Spending Review 2010 - Treasury Contents


Written evidence submitted by the Local Government Association

BACKGROUND

  Local government faces some of the sharpest spending cuts in the public sector. Councils will look at ways of delivering services more efficiently, and the sector led national productivity programme is designed to help in this area, but the scale and speed of spending reductions means front-line services will be substantially affected.

  The spending review sets out real terms reductions of 28% in local authority budgets over the next four years. This compares with overall cuts of 8.3% across all departmental budgets.

  Moreover local authority funding reductions are "front loaded" falling from £28.5 billion in 2010-11 to:

    — £26.1 billion in 2011-12

    — £24.4 billion in 2012-13

    — £24.2 billion in 2013-14

    — £22.9 billion in 2014-15

  For England as a whole, our expectation before the Spending Review, based on a £20 billion funding gap by 2014-15 (an outline of the pressures councils face is included as an appendix), was that in the first year the gap to be bridged would be around £4.5 billion.

  The LGA analysis of the settlement as announced is that the first year gap is around £6.5 billion. There is a real risk that to be able to cut their budgets by this much this quickly, local authorities will have no choice but to take decisions that would have an adverse impact on local services and not provide value for money.

NOT ALL INFORMATION IS YET AVAILABLE

  Whilst the spending review set out general direction, individual Councils do not yet know what their actual level of funding will be in the next financial year, which can vary substantially from the average figures quoted. More information should be available in early December. It is extremely important that councils have the earliest and greatest clarity about their financial position to be able to plan to deliver these challenging budgets.

  A large part of this clarity will come from the "ceilings and floors" which will determine the minimum and maximum reductions of grant for councils.

  After December Councils will only have around eight working weeks to draw up unprecedented spending reductions. They will need to consult with businesses, users, taxpayers and affected staff prior to formally agreeing these far-reaching choices. The timetable for doing so is incredibly tight.

FRONT LOADING

  The front loading of spending reductions means councils have to cut spending more quickly than most other parts of the public sector. Whilst local government has a track record of managing their budgets, spending reductions on this pace and scale are unprecedented and will pose particular challenges.

  Much of local government's spend is committed well in advance. This includes:

    — Long-term contracts with private businesses, for services such as refuse collection and disposal, or back-office systems such as housing benefit and council tax collection. Proper renegotiation of these contracts takes time.

    — Payments on debts for buildings and other infrastructure, including payments through PFI arrangements on long contracts.

    — Grants to voluntary organisations. Whilst these grants can be reduced at short notice—it shifts the burden onto community organisations that will in turn need to make rapid spending reductions.

  Local government's aim is to reduce spending in as efficient a way as possible. The largest single source of spending is on staff. Here costs can be more economically reduced, and key skills retained, if done in a planned way.

  The front loading of the general settlement makes each of these approaches much more challenging. However there is flexibility in withdrawal of specific grants, and the LGA calls for these to be withdrawn more slowly—to allow councils to deliver spending reductions as efficiently as possible.

INDIVIDUAL RING-FENCED GRANTS

  Local government has long called for the end of ring-fencing of individual grants as we believe local communities are better placed to decide on how to prioritise local resources and value for money. The government has recognised this in the spending review and has announced a substantial end to ring-fencing and the LGA welcomes this development.

  That said, some of the largest grants—such as the dedicated schools grant—remain ring-fenced.

OTHER GRANT FUNDING

  At the time of writing, the future of £1 billion in funding that had previously been in Area Based Grant has still to be clarified. The majority of these are in the area of children's services (approximately £874 million).

  Changes to these grants could have an enormous impact on individual councils' financial positions. In the case of the £450 million Working Neighbourhoods Fund, which the government has said will not be continued after 2010-11, a number of authorities face the immediate loss of grant of more than £10 million in 2011-12, resulting in larger first year reductions in spending being required. For example, if one large authority receives the average reduction of 10.7% in its Formula Grant for the first year of reductions, the ending of the Working Neighbourhoods Fund will then increase possible reductions in that council's expenditure to 17.6% in 2011-12.

FORMULA GRANT

  At present business rates are collected and, together with Revenue Support Grant, make up what is called "formula grant". CLG have set out a list of individual grants which are to be added to formula grant.

  The LGA has highlighted that, by 2014-15 having taken account of these grants added in, and after making prudent assumptions of business growth of 0.5%/0.7%/0.7%/0.7% in the years 2010-11 through till 2014-15, there appears to be a £2 billion gap in funding available to local government.

  This area of the spending review is unclear and clarity is needed.

PLACE BASED/COMMUNITY BUDGETS

  The LGA is pleased that the government has taken on board its place-based budgets proposal and is going to implement a version of it. The first community budgets already involve nearly a fifth of all upper-tier councils.

  The more areas that can adopt this model quickly, the more needless cost and bureaucracy can be taken out and the more money will be saved for the front line. We believe this model of accountability will help deliver better services cheaper—by moving spending to prevention. At the same time it should allow a better focus on the needs of communities and individual service users.

  A genuinely localist approach will allow organisations in the local area to pool budgets for whatever purpose they choose so as to provide the best services for local people and the most efficient use of public money.

  The LGA seeks clarification that this programme will be rolled out to other local authorities by 2013.

PWLB INTEREST

  At the same time the spending review was announced, the terms of the Public Works Loans Board, were changed. Councils now pay a higher rate of interest on loans they take out from this source than other parts of government.

  Councils have been prudent in this area. Since 2004 accumulated "prudential" represents just 4.35% of local authority assets.

  This change has real consequences, money that might have been spent on rebuilding roads and other infrastructure will be spent on servicing interest on loans between tiers of government.

HOUSING FINANCE

  The commitment to end the system of housing subsidy, in which tenants in effect pay some of their rent to central government, is very welcome. The detail of this is still to be announced, including the amount that local government will need to pay to buy itself out of the existing system. For example, the Spending Review confirmed that the Government will provide £2 billion funding for Decent Homes, whereas CLG's own research noted that the backlog for bringing existing homes up to the Decent Homes standard is already in the region of £6 billion.

  It was anticipated that housing finance reform based on localism would see 100% of receipts from the sale of properties under the "Right to Buy" scheme returned to councils. The Spending Review states that HM Treasury will continue to take 75% of the sales receipts.

  Therefore, early clarity of the reform of housing finance will be welcomed.

BUSINESS RATES

  The announcement to consult on ways of enabling councils to retain locally-raised business rates is very welcome, and has been a longstanding call of the local government sector. As a responsible part of government, with good links to the business sector, councils will look forward to working with that community in deciding priorities and the level of funding needed to achieve those objectives.

SCHOOLS CAPITAL

  Suggestions have been made in Children and Young People Now (2nd November 2010) that the £15.8 billion announced in the Spending Review for a four-year capital programme by the Department for Education covers the 600 schools or academy projects previously approved under the Building Schools for the Future programme which covered secondary schools.

  In our submission to the James Review on Education Capital by the Department for Education the LGA estimated that the total increase in essential capital costs (for fulfilling statutory duties such as sufficiency of school places or health and safety) for the primary sector was £6.98 billion over the Spending Review period.

  We seek clarification over how the £15.8 billion announced in the Spending Review for schools capital will be allocated.

NON-SCHOOLS BASED CHILDREN'S SERVICES

  The main formula grant, which provides the bulk of funding for non-school based children's services, will fall, on a like for like basis, by 28% in real terms over the course of the Spending Review. In the first year there will be a cash reduction of 10.7% for all authorities. However, we do not yet know the size of the new Early Intervention Grant. We seek clarification over the size of this grant and how it will be allocated.

ADULT SOCIAL CARE FUNDING

  The additional £2 billion for adult social care is welcomed by councils. However, the LGA estimates that the rise in annual costs of adult social care could be in the region of £6 billion by 2014-15. The Commission on Funding of Care and Support must address how much more money can be brought into the adult social care system to address this shortfall.

  Whilst £1 billion of this additional funding will be allocated to councils, the LGA seeks clarification over how and to whom the remaining £1 billion will be allocated.

November 2010

APPENDIX A

THE PRESSURES FACED BY COUNCILS AND PUBLIC SERVICES

    — The cost of adult social care, where local authorities currently spend £14.4 billion per annum, could rise to £20 billion by 2015. The principal driver is demographic change, accounting for potential cost increases of 4% year on year.

    — The transfer of public health responsibilities to local government is welcomed, but the proposed ring-fencing of the budget would perpetuate patterns of spending that see 96% spent on treating illness and less than 4% spent on keeping people well.

    — The numbers of school age pupils are forecast to rise by almost 3% by 2014, creating pressures on school places that are already acutely felt in the primary sector.

    — There is also a pressing need for capital investment in schools. Recent analysis by the LGA and Association of Directors of Children's Services shows that £15 billion is the absolute minimum councils need between now and 2015 to meet statutory requirements, such as to provide school places and maintain health and safety.

    — Following the Baby P case, child protection costs, including the costs of looking after children in care, are rising sharply, with a 10% increase from the previous level of £2.2 billion very likely to be sustained into the future.

    — The clarification in a recent court case of local authorities' responsibilities to provide housing for lone homeless 16 and 17 year olds will lead to ongoing extra costs of £160 million per annum.

    — Taken together, these and other pressures are likely to lift the total cost of childrens' services by at least £5 billion over the next four years, even if pay and related costs can be constrained at levels significantly below general inflation.

    — Waste collection and disposal together are the third largest local government services in terms of spend after education and social care. Costs, excluding capital investment, are likely to increase from £3.4 billion in 2010-11 to £4.3 billion by 2014-15.

    — Waste disposal costs have risen very steeply, driven by a six-fold increase in landfill tax over 12 years and with a £140 million EU fine in prospect if completion of waste management projects is delayed.

    — In this area, both investment in the new facilities needed and renegotiation of contracts for waste disposal have long lead times, meaning there are few quick wins in reducing costs.

    — Flooding is now recognized as a key hazard facing this country. From April 2011, local authorities take on new responsibilities for which it is expected there will be a large but uncertain cost. Without adequate investment, there is considerable risk to the arrangements agreed with the insurance industry on the availability of appropriate insurance cover.

    — The recession had a significant impact on local authority finances, for example with investment income falling by £1.5 billion. Despite this, local authorities moved rapidly to put in place and implement substantial programmes of action to counter the effects of the recession in their areas.

    — Public sector retrenchment will have further impacts on local economies. While the recognition of local authorities' lead role in economic development in the proposal to create Local Enterprise Partnerships (LEPs) is welcome, LEPs need to be resourced properly. At present their only confirmed source of funding is the £1 billion Regional Growth Fund, which falls far short of the funding that had been allocated to Regional Development Agencies.

    — More widely, the scale of investment required to meet the country's infrastructure needs has been credibly estimated to be at least £500 billion by 2020, or an investment of £50 billion per year for the next decade, far beyond what can currently be afforded.

    — Local government currently spends £1.1 billion on providing concessionary travel schemes, and a further £2.6 billion on support to travel operators. Research commissioned by the LGA on projections of expenditure on concessionary travel in England from 2008-09 to 2013-14 suggests that reimbursement costs could increase by 20% in real terms over this period. In addition, demographic pressures will add to costs.

    — Crime and anti-social behaviour are already high profile public issues, and the 2012 Olympic and Paralympic Games will add to security pressures. With pay and related overheads accounting for most spending in policing, it will be difficult to make significant savings without reducing police numbers.

    — Added to this, tighter budgets may mean that councils will find it a challenge to continue to provide the discretionary services that reduce crime and anti-social behaviour such as provision of street lighting, alley gating and street wardens or PCSOs.

    — As with police, the majority of fire service spending is on the workforce, so savings would largely be achieved through staff reductions.

    — Although local government has managed the pay bill more effectively than the rest of the public sector, equal pay and pensions liabilities remain significant pressures. The eventual cost to local authorities of equal pay settlements could be up to £4 billion, some of which could be realised over the period to 2014-15. On pensions, increasing life expectancy and difficult stock market conditions over the last decade are likely to lead to significant increases in contribution rates over the next few years, and reforms that might make future costs more affordable are unlikely to take away that pressure.





 
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Prepared 26 November 2010