Select Committee on Office of the Deputy Prime Minister: Housing, Planning, Local Government and the Regions Ninth Report

3 The Role of Central Government


63. Central government has the power to restrict the revenue raising capacity of local government, often referred to as capping. In the 1980's this power was used to restrict the size of local authority budgets. In the 1990s this developed into crude and universal capping of all local authorities. The current Government did not use its power to cap the budgets of individual local authorities until this year. The reintroduction of selective capping generated much criticism from local authorities who felt unfairly treated, especially those who had been rated as Excellent authorities in the Comprehensive Performance Assessment (CPA), and were under the impression that they would not face the imposition of a cap. On 8 July 2004 the Minister for Local and Regional Government announced that the budgets of six authorities would be capped for 2004-05, and that eight authorities would have notional budgets imposed, against which future increases would be measured for capping purposes.[65] In this section, we examine the implications of capping for council tax and the balance of funding, rather than the specific circumstances of this year's events: in particular the impact of capping on local authority spending plans, and the subsequent impact on local accountability.

64. Some question whether central government should have the power to cap local authority council tax increases at all, seeing the level of local taxation as a decision for the local electorate. The Local Government Information Unit associated the use of capping with diminishing local accountability. In their written evidence they argued that:

"We believe that it should be left to local people to decide whether their council has acted properly in setting the local tax rate. Capping budgets denies local accountability. There is not a cogent economic case for the central control of local taxation. Clearly, any government would want to control its own direct input to local authority spending and council tax levels have implications for council tax benefit expenditure, but the question should be how far does central government need to control local authority taxation in order to ensure macro economic stability and balance within the economy."[66]

Professor Travers also argued that capping damages local accountability. He stated that:

"I do not think capping is an appropriate mechanism, in part because the margin on local government spending in any year is very small in relation to the whole economy and therefore I think it is unlikely to unbalance the economy in any one year, but in terms of local accountability I think that having national government intervening to set local taxes is very damaging to the notion of accountability at the local level."[67]

65. The Special Interest Group of Municipal Authorities (SIGOMA) concurred with the arguments developed by the Local Government Information Unit and Professor Travers. They argued that capping restricts the ability of local authorities to have a real influence on local policy-making, and that the principle of capping was "fundamentally in conflict with the accountability of local authorities."[68] In their evidence to the Committee the Audit Commission also highlighted the detrimental effect on local accountability of capping:

"If councils are properly accountable to local citizens for the spending and taxation decisions they make, there should not be a need for centrally imposed ceilings on spending and/or taxation through capping or similar mechanisms [...] transparency at a national and local level, stability and predictability of funding mechanisms, and reduced micro-meddling in local spending decisions would all lead to increased accountability. Capping may be thought necessary when other forms of accountability are missing but is a poor substitute for real local accountability."[69]

66. From a local authority perspective capping was interpreted as a general and indiscriminate punishment. Cllr Bakewell, the Leader of Somerset County Council, argued, "I think capping is a pretty blunt tool. It does not really relate to the local population. If councils raise council tax too high the local electorate will pretty soon let them know".[70] She further argued that, "Councils still have priorities. They still have the people there which they have to provide the services for. I think it is better for councils to relate to their electorate and to their residents and for them to decide what is an adequate level".[71] When asked who it was that felt the pain of capping Cllr Bakewell replied:

"The pain is felt by the public because of the rebilling costs, because that, as I said before, is dead money, you do not get anything for the cost of rebilling, and that obviously goes on to the council tax, or the service cuts which support that […]."[72]

67. Paul Woods from the Association of North East Councils disagreed: "[…] history has shown that there is a need to have a reserve power of capping. I think there needs to be that pressure."[73] In his evidence to the Committee John Healey MP, Economic Secretary to the Treasury, defended the Government's use of capping:

"[…] there has to be some control of public spending, central and local and if we do not have some control of public spending, then we run severe risks with the economy, we run the risk of seeing our public finances run out of control."[74]

The Local Government Association acknowledged the Government's reasons for capping:

"The LGA recognises that the Government does have a legitimate interest in macroeconomic stability and that local government expenditure represents around 25% of all public expenditure. It believes in a partnership approach to ensuring this stability, for example, through discussions within the framework of the Central Local Partnership."[75]

68. A possible rise in local taxation could be considered by the electorate in a referendum. This type of local consultation has been piloted by Somerset County Council. In their written evidence to this inquiry they detailed the results of a comprehensive budget consultation exercise, carried out using questionnaires and focus groups, which allowed the local authority to gauge local feeling on different levels of council tax increases.[76]

69. The Local Government Association argued that there could be other solutions to the balance of funding problem that would remove the need for central government to cap local government.

"Rather than placing a ceiling on local government expenditure as a means of controlling council tax rises, the LGA would like to see local authorities provided with adequate revenue raising capacity. Measures such as reforming the council tax, relocalising business rates, introducing a form of local income tax and other taxes and charges could shift the balance of funding, and give local authorities more autonomy in spending decisions, without unfairly burdening council tax payers."[77]

The feasibility of alternative means of raising local revenue will be discussed further in a later chapter.

70. The Committee acknowledges that the Government wants to ensure that its national policy agenda is followed at local government level, and in particular its macro-economic policies, although we have expressed our conviction that variations in local government expenditure have little macro-economic effect. We believe that this would be more constructively achieved through discussions within the Central-Local Partnership than by capping. It is much more appropriate for local authorities to be held to account for local decisions, including the level of local taxation, through the ballot box. If the Government insist on retaining capping, capping should be selective, rather than general and selected local authorities should be given a year in which to meet the requirements.

Passporting and Ring-fencing

71. "Ring-fencing" is the term used for "specific formula grants" designed to fund particular services or initiatives that are a national priority: for example, a mental health grant which helps to secure a certain level of provision for mental health services in each authority with social services responsibilities. "Passporting" is a recent mechanism used by the Department for Education and Skills to ensure that increases in the Formula Funding Share for schools leads to pound-for-pound increases in school budgets. It leaves little room for local discretion; the Minister for School Standards told us that 95% of local authorities passport the recommended levels of funding to schools. [78]

72. The Minister for Local and Regional Government justified the use of ring-fencing:

"When you are introducing changed arrangements on highly sensitive services such as supporting people, involving very considerable flows of revenue which are there to help some of the most vulnerable people in our society, if there were no ring-fence at all when that was introduced, real fears were expressed by many of those responsible for those services that this could have a catastrophic consequence on the recipients of the service, if an individual local authority chose not to use the resource for that purpose at all."[79]

The Minister for School Standards told us:

"The passporting affirmation by the whole of government reflects the commitment which the whole of government shares to education. In addition, it is significant that local government increasingly sees education not as separate from its ambitions for economic and social renewal, but actually as central to them."[80]

73. The majority of our witnesses could see little or no difference between ring-fencing and passporting, and identified the same drawbacks in both funding mechanisms. Yet the Government has argued that there is a difference between ring-fencing and passporting. In his evidence to the Committee the Minister for School Standards stated that "The passporting is a separate issue and the passporting debate reflects the priority the Government believes education should have in national investment".[81] He further argued that the difference between ring-fencing and passporting was in the realm of choice. For example:

"Wandsworth spends 93% of the EFSS on education and the top spending education authority, which I think is Bristol though I stand to be corrected, spends 110% of EFSS. So there is actually a wide variation in education spending by local government."[82]

We share the view of most of those involved in local government that the difference is indeed largely semantic.

74. Ring-fencing and passporting are said to undermine local accountability, local diversity and local discretion, in an attempt to impose national policies and priorities at local level. The County Council Network (CCN) for example told us:

"[…] the requirement to passport education funding means the budget provision for education is, in effect, dictated by central government and not by local need. This also has the added disadvantage of diverting focus from all local authority services to those which may directly be affected by the resulting level of council tax, outside the protection of the passporting system. The CCN believes that the requirement to passport funds to education must be removed from the FSS system and local authorities should be given the freedom and flexibility to decide on the level of local education budgets based on local service needs."[83]

The Local Government Information Unit argued:

"Ring-fencing and passporting, combined with complex and fragmented funding streams for area based initiatives with various regeneration aims, undermine local, strategic decision making."[84]

Professor Travers added that perhaps our understanding of local variation was unduly negative:

"We all hear a great deal about the evils of the postcode lottery and my concern about that is if the postcode lottery is always seen as such an evil that there is not much room for local government. If in a sense every service must be the same everywhere then there is not much room for local discretion."[85]

And that:

"I think in the long term the what you might call "he who pays the piper calls the tune" argument where national government raises a large proportion of all taxes and then redistributes part of it through grants to local authorities leaving local authorities raising only a small proportion of their income from local taxes is likely to lead to national government feeling that it is its money that is being spent and therefore involving itself through specific grants, passporting, and a range of controls and interventions which do amount to eroding local autonomy and in that indirect way feeding through into a relationship between the proportion of money raised locally through local taxation and the amount of central involvement […]."[86]

Nicholas Boles from the Policy Exchange summed it up:

"At the moment we are trying to pretend that we are giving the money to local government but then we are actually telling them how to spend it and that is nuts."[87]

75. The Leader of Somerset County Council highlighted the decision that many authorities face when asked to passport central government money through to schools is one without real choice:

"Whilst I support putting money into education and have always done that and would always passport through to schools wherever possible, the increasing trend towards ring-fencing is not particularly helpful. Is local government there just to deliver National Government's priorities?"[88]

76. A further effect of the degree of dictation from the centre of local service level, and expenditure is an inappropriate concentration on those areas at the expense of others, a tendency magnified by the associated regime of targets and inspections. It can also lead to a sense in local Government that areas funded centrally are the concern of central government.

Cllr Gibson from the North East Regional Assembly stated:

"As resources get scarcer and scarcer, if the ring-fencing continues then the result of that will be that the services of which people approve - culture, art, theatres, street-cleansing, those sorts of issues over which we have control - will start to disappear and so local government will become less and less popular."[89]

Dan Corry told us:

"In education I have some worries that if you directly fund it from Whitehall local government will say, 'We are not going to bother getting involved in education,' and I think that would be a big mistake because I think a lot of the difficult issues of underperforming children and schools and so on need the local authority fully involved."[90]

77. In unitary authorities, education represents such a substantial slice of expenditure that passporting can have a devastating impact on local autonomy, leaving only a small proportion of the budget for locally determined priorities. Paul Woods from the Association of North East Councils noted:

"In most local authorities who are unitary authorities education will account for perhaps 40 to 50% of a budget, a very substantive part. The next significant element is social services."[91]

78. It must however be recognised that central government will always wish to have influence or control over some of the funds it passed to local authorities, and that ring-fencing may in some circumstances be appropriate. The Leader of Somerset County Council highlighted the dilemma facing the Department for Education and Skills when striving to set standards:

"[…] education is not necessarily the priority of quite a large section of our population. I personally find that quite sad, that some elderly people, a large proportion of elderly people, are not prepared to put money into education; they perceive that education is adequately funded."[92]

In their written evidence Somerset County Council accepted that they felt that there were some circumstances whereby ring-fencing might be acceptable. For example,

"The use of specific grants, passporting and hypothecation are particularly problematic issues and the County Council view is that these should only be used when:

- the local authority is administering mandatory grants

- there is a desire to encourage experimentation or a new function is being introduced

- formula grant distribution would be patently unfair"[93]

79. The Minister for School Standards developed the Government's argument for the need to ring-fence portions of central Government grant when he commented that, "I think those three reasons, tackling inequality, promoting innovation, spreading good practice, are three good reasons why one can have ring-fenced grants".[94] The Minister for Local and Regional Government commented:

"I think of services such as Sure Start, where huge impacts have been achieved at a local level in terms of services for very vulnerable people in deprived communities and that benefit is something which also has to be borne in mind when we think about the consequences of ring-fenced funding in the years since 1997."[95]

An official from the ODPM told us that there was a recognised need for ring-fencing:

"[…] for example to embed something new that you want done, that everyone wants done, but the Government is also clear that its overall policy is to restrict ring-fencing, only use it where necessary and keep it constantly under review so that as soon as we do not need it we remove it."[96]

80. The current level of ring-fencing and passporting is however accepted as being neither efficient nor effective. The Audit Commission told us:

"Ring-fencing of grants and other targeting of funds—including the requirement to passport funds to education—do not promote efficient and effective resource allocation at a local level."[97]

and in their report 'Council Tax increases 2003/04 Why were they so high?' the Audit Commission recommended that Government should, "[…] reduce direct controls over councils through targets and continue to reduce ring-fencing of grants […]".[98] The Government too has acknowledged that ring-fencing can have a detrimental effect on the implementation of policy. The Minister for Local and Regional Government stated in his evidence to the Committee:

"It does have the adverse effect the Audit Commission have expressed and we have been seeking, as you rightly highlighted, to reduce it and we have been reasonably successful in getting the trend downwards and we intend to go on."[99]

For the year 2004/5 the total ring-fenced grant is 23.4%,[100] of central government grant. By next year the Government aims to reduce the proportion of grant that is ring-fenced to 10% of central government grant.[101] The announcement of three-year budgets for every school from 2006 referred to at paragraph 59 above also made plain that these grants would be "guaranteed by national government and delivered through local authorities".[102]In response to questioning, the Secretary of State for Education and Skills told the House, "In future, such allocations will be ring-fenced. This is a significant issue for local government, as my hon. Friend's question suggests. Those authorities will be able to top up education funding by choice, if they wish".[103] It is hard to fathom how the introduction of a completely ring-fenced schools grant, pre-allocated by central Government to individual schools, can sit with a target of reducing the proportion of central Government grant to local authorities which is ring-fenced.

81. Despite the 8 July announcement by the Secretary of State for Education and Skills, we recommend that the Government ensure that its target of reducing a ring-fenced grant to 10% of overall grant in 2005/6 is met. The Government should provide an annual statement of its performance and intentions with regard to ring-fencing and passporting in future years.

82. We recommend that the Government reconsider the use of ring-fencing and passporting, and acknowledge the potential role of the local electorate in terms of setting the local agenda. Mechanisms such as the central-local partnership can be used to ensure minimum standards. However, local authorities should be given the freedom to implement local priorities, and be judged for these decisions by the local electorate.

83. The Government should allow local authorities to make spending decisions, and take the consequences for these decisions at the ballot box. If Central Government wishes directly to control education funding it should consider funding education directly. If it believes that education is an important and integral part of local government services and funding it should set minimum standards and then allow local discretion. The present situation lacks clarity and transparency as to where responsibility lies.

Best Value and CPA

84. The Best Value and Comprehensive Performance Assessment processes were designed to improve performance at local government level. Best Value encourages local authorities to provide services in the most efficient and economically effective way, with an additional focus on what is best for the community. The Comprehensive Performance Assessment (CPA) judges to what extent local authorities are achieving Best Value in a wide range of services and audits the performance of local authorities on this basis. The Audit Commission carries out inspections, and marks authorities depending on their performance. Those authorities who achieve the highest grades are given more freedom from future inspection. Some local authorities interpret external inspection as an unnecessary burden on their resources and a characteristic of the controlling nature of central government.

85. The Committee has received evidence from various groups who felt that the role of inspection, CPA and Best Value had had a negative impact on their authority. Cllr Gibson stated that, "I think there are too many inspections, especially in education and social services".[104]

86. Professor Travers alluded to the potential unintended consequences of targets and inspections such as the CPA,

"I do not know of any research that would suggest that the possibility that being an excellent authority would lead to freedoms is what makes them try to be excellent. I think they want to be excellent because they want to be excellent and all authorities want to get as far as they can up the league, as it were."[105]

87. The Leader of Somerset County Council identified that when authorities were poorly branded they were burdened with even more inspections that diverted officer focus and resources away from core services.

"It is the case that when authorities are rated as weak or poor there are more inspections for which authorities have to pay, and it is a bit of a bone of contention that you have to find money to pay for the inspectors, which I would not say we could do without, it is right that we should be inspected, but the level of inspection is very, very onerous."[106]

88. Those authorities that are branded more highly have less problems with this, although as Paul Woods from the Association of North East Councils noted:

"I am from a good authority […] The amount of inspection from the Audit Commission has started to reduce noticeably. That is starting to help. I think it could be reduced still further and it will help further, because, you are right, capacity is a key issue."[107]

89. Paul Woods argued that the role of inspections was initially useful for local authorities,

"My own experience is that the CPA does consume quite a significant amount of officer time. However, we felt that the process was certainly worthwhile because it helped our self-assessment of the quality level in services and it stimulated us to look at certain areas where we want to improve ourselves."[108]

90. However, as Chris Bilsland from Somerset County Council identified, "We have never seen an Ofsted report, we have never seen an SSI report that did not encourage us to spend more money. They are always routing for more with the backlash of consequences".[109]

91. Professor Bramley in his evidence to the Committee noted,

"I think the Audit Commission has done valuable work over the years in looking at value for money in particular services and highlighting problems and keeping a general watching brief on things, but to run the whole system around a CPA process seems to me to be very centralist and at the end of the day it is still quite a subjective judgemental process."[110]

92. The Committee recommends that the Government dramatically reduce their inspection regimes on local authorities. In particular the Government should consider the concerns of smaller local authorities and ensure their inspection regimes are proportionate to their size and responsibility. The Government should continue to free "good" and "excellent" authorities from some inspection and plan-making regimes and should ensure the inspection framework is appropriate to the improvement needed in "poor" and "weak" councils.

65   HC Deb, 8 July 2004, cols 42-43 WS Back

66   Ev 17 HC 402-II [Local Government Information Unit] Back

67   Q 51 [Professor Travers, London School of Economics] Back

68   Ev 42 HC 402-II [Special Interest Group Of Municipal Authorities] Back

69   Ev 58-9 HC 402-II [Audit Commission] Back

70   Q 207 [Cllr Bakewell, Leader, Somerset County Council] Back

71   Q 208 [Cllr Bakewell, Leader, Somerset County Council] Back

72   Q 215 [Cllr Bakewell, Leader, Somerset County Council] Back

73   Q 542 [Mr Woods, City Treasurer, Newcastle-upon-Tyne City Council and Finance Officer, Association of North East Councils] Back

74   Q 659 [John Healey MP, Economic Secretary to HM Treasury] Back

75   Ev 25 HC 402-II [Local Government Association] Back

76   Ev 46 HC 402-II [Somerset County Council] Back

77   Ev 25 HC 402-II [Local Government Association] Back

78   Q 732 [Mr Miliband MP, Minister of State for School Standards] Back

79   Q 782 [Mr Raynsford MP, Minister of State for Local and Regional Government] Back

80   Q 718 [Mr Miliband MP, Minister of State for School Standards] Back

81   Q 716 [Mr Miliband MP, Minister of State for School Standards] Back

82   Q 721 [Mr Miliband MP, Minister of State for School Standards] Back

83   Ev 54 HC 402-II [County Council Network] Back

84   Ev 17 HC 402-II [Local Government Information Unit] Back

85   Q 57 [Professor Travers, London School of Economics] Back

86   Q 55 [Professor Travers, London School of Economics] Back

87   Q 18 [Mr Boles, Director, Policy Exchange] Back

88   Q 196 [Cllr Bakewell, Leader, Somerset County Council] Back

89   Q 537 [Cllr Gibson, Leader, Stockton-on-Tees Borough Council, and Chairman, North East Regional Assembly, and Chairman, Association of North East Councils] Back

90   Q 19 [Mr Corry, Director, New Local Government Network] Back

91   Q 539 [Mr Woods, City Treasurer, Newcastle-upon-Tyne City Council and Finance Officer, Association of North East Councils] Back

92   Q 206 [Cllr Bakewell, Leader, Somerset County Council] Back

93   Ev 43 HC 402-II [Somerset County Council] Back

94   Q 707 [Mr Miliband MP, Minister of State for School Standards] Back

95   Q 783 [Mr Raynsford MP, Minister of State for Local and Regional Government] Back

96   Q 118 [Ms Bell, Director of Local Government Finance, Office of the Deputy Prime Minister] Back

97   Ev 55 HC 402-II [Audit Commission]  Back

98   Audit Commission 2004 'Council tax increases 2003/04 Why were they so high?' p3 Back

99   Q 782 [Mr Raynsford MP, Minister of State for Local and Regional Government] Back

100   ODPM Local Government Finance Settlement table 1 Back

101   Q 782 [Mr Raynsford MP, Minister of State for Local and Regional Government] Back

102   HC Deb, 8 July 2004, col 1012: italics added Back

103   HC Deb, 8 July 2004, col 1025 Back

104   Q 54 [Cllr Gibson, Leader, Stockton-on-Tees Borough Council, and Chairman, North East Regional Assembly, and Chairman, Association of North East Councils] Back

105   Q 58 [Professor Travers, London School of Economics] Back

106   Q 190 Cllr Bakewell, leader, Somerset County Council] Back

107   Q 541 [Mr Woods, City Treasurer, Newcastle-upon-Tyne City Council and Finance Officer, Association of North East Councils] Back

108   Q 540 [Mr Woods, City Treasurer, Newcastle-upon-Tyne City Council and Finance Officer, Association of North East Councils] Back

109   Q 189 [Mr Bilsland, Corporate Director (Treasury), Somerset County Council]  Back

110   Q 47 [Professor Bramley, Heriot Watt University] Back

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