Localisation issues in welfare reform

Written evidence from London Councils (LWR 09)

1. London Councils welcomes the opportunity to provide written evidence to the Communities and Local Government Select Committee on this important issue for London.

2. This submission is focused on the implications of the proposals to localise council tax benefit (CTB). Our concerns regarding the wider proposals in the Welfare Reform Bill are set out in the London Councils response to the Welfare Reform Bill, which is appended for reference.

3. In principle, London Councils is in favour of devolution and localism, however, with so little definitive detail available on this policy we are left with some significant concerns that we believe need to be considered and addressed before our members can take a properly considered policy position.

4. As such, this submission reflects the initial views of London Councils officers and does not represent a formal statement of policy from our Members.

The Current Picture in London

5. The Government announced plans to localise CTB in the Spending Review in October 2010. These plans coincide with an overall 10% cut to the national funding available to resource CTB. These reforms are also included as part of the broader terms of reference for the Local Government Resource Review (LGRR).

6. The cuts to CTB funding will come into force at a time when overall funding available to local authorities is vastly reduced. The 2011-12 and 2012-13 Local Government Finance settlement puts into effect the first tranche of Spending Review cuts. In total, local government funding (excluding schools, police and fire) will be reduced by 26% in real terms over the next four years. The majority of these cuts are being delivered through reductions in Formula Grant. London boroughs and the City of London have seen reductions to their Formula Grant of 11.3% in 2011-12, and 7.6% in 2012-13.

7. Against this backdrop, CTB paid in England has been steadily increasing in all regions over the 13 years up to 2009-10. Using 2011-12 prices, CTB expenditure in London has risen by 55% over the past 10 years alone. This data is supported by the overall increase in the numbers of CTB claimants receiving 100% benefit. In London, these claimants have increased by 9% over the three years to January 2011, in line with the national average increase of 8%. [1]

8. London Councils has identified four main areas for comment: scheme design; funding; the impact on CTB claimants; and the intended timescales for reform. These issues are addressed in detail below.

Scheme design

9. From the information currently available, it is not clear to what extent local authorities will be able to design their own local CTB scheme. Information released during the Spending Review 2010 suggested that local authorities will need to devise, assess and implement local CTB schemes by April 2013 - ‘local authorities will be given flexibility to tailor the scheme to meet local priorities and to manage spending within lower limits…’ [1]

10. Despite the intention to localise CTB, the Government is also clear that its aims are to ‘….protect the most vulnerable, particularly pensioners….’ [2] DWP has also indicated that any reforms to CTB should not undermine the incentive to work and so, some form of protection will also be required for working claimants. This would suggest that local authorities would have to target those on benefits to deliver the 10% reduction in funding.

11. There is no indication of how potential protection mechanisms for different groups may be implemented – e.g. whether the Government will draw up best practice guidelines, or whether local authorities will have to apply some mandatory national criteria. It is also likely that local authorities will come under pressure from local and national lobbying groups to ensure that local CTB schemes cover specific sections of the population.

12. It is reasonable to assume that as more protection is provided to certain target groups, it becomes more difficult for local authorities to control costs. Given the government indications about needing to protect certain groups, local authorities will have to manage these pressures, whilst also delivering a 10% reduction in funding.

13. London Councils would welcome further clarity on the extent to which local authorities will be able to design their own local schemes and the level of statutory guidance.

The impact on current and new CTB claimants

14. The reforms to the Welfare System, and particularly the introduction of the Universal Credit, have focused on the principle of a single benefit/single entry system. London Councils officers feel that the concept of a local council tax benefit scheme is at odds with this principle. Were local authorities to be given full discretion over CTB, one of the potential consequences could be that each local authority develops a slightly different scheme. This could potentially confuse claimants wishing to claim CTB. This is particularly true for mobile groups who may find their entitlement to CTB changes if they move into a different local authority area. In extreme cases, different local schemes could lead to ‘benefit chasing’ as claimants move between authorities to access a more ‘generous’ CTB scheme. This could be a significant issue for London authorities which have highly mobile populations.

15. As CIPFA have noted, if the Government implements a fixed cash grant for CTB, ‘Where it looks as if the cash limit will be reached before the end of the financial year, a local authority may have to tighten its rules in-year or otherwise reduce awards or refuse to make any further awards.’ [1] This will not only lead to confusion for claimants but could result in asymmetric benefit provision to similar households within local authorities. Should such a situation arise, this would compound the fact that there is less funding available nationally. The 10% funding reduction has clear implications for the amount of CTB paid in local areas – it is likely that some CTB claimants (existing and new) will see a reduction in the amount of benefit that they are paid.

16. Once again, the lack of information on how a local scheme will work prevents an understanding of the full impact on claimants and their experience of the Welfare system.

Funding

17. The financial management of a local CTB scheme will present considerable challenges for local authorities and the question of how to fund these schemes is an important issue.

Benefit Payments

18. The cost for CTB benefit in London (using 2011-12 prices) has steadily increased over the last 11 years (bar a temporary dip in 2007-08). In 2009/10, London local authorities incurred expenditure of £760 million on council tax benefit. The current economic climate would suggest that the demand for benefits may continue to rise.

19. Given council tax benefit is a demand-led item of expenditure; any growth in the cost of CTB is included within the government’s annually managed expenditure (AME) figures under the current financial system. Expenditure is often reported under AME as the Government believes it cannot be reasonably subject to close control over a spending review period. Any growth beyond spending assumptions is captured in the Government’s overall borrowing requirement.

20. Should CTB be fully localised, it is unclear how an authority would meet growth in its CTB expenditure. Current regulations would prevent local authorities from borrowing to meet its spending requirements and reduced funding levels will limit the capacity for local authorities to respond to growth through its own resources. Any response by the local authority to do so could have a significant impact on frontline services or council tax levels. The ability of a local authority to manage a demand based benefit from a fixed (and smaller) cash funding pot will be a significant challenge going forward. London Councils officers would suggest that the localisation of council tax benefits could represent a significant financial risk to local authorities should there be no recourse to a more flexible and buoyant funding source.

Administration

21. At present, local authorities receive the Housing Benefit and Council Tax Benefit Administration grant to fund their administration costs. In 2011/12, London will receive £92 million (£370 million across England). With the move to Universal Credits, we would assume that it is unlikely this grant will continue in its current form. However, no information has yet been published which details how local authorities will receive funding for their administration costs.

22. Under current arrangements, CTB administration is combined with housing benefits (HB), allowing economies of scale. Once the responsibility for administering HB transfers to DWP, local authorities will still need to maintain a suitably resourced framework in order to administer a local CTB scheme. London Councils officers would suggest that the administration of any CTB scheme will represent a significant undertaking and local authorities will need government funding to ensure that it is properly resourced and reflects the level of complexity in any local scheme.

The intended timescales for reform

23. At present, it is difficult to comment on how realistic the timescale for change is. Much will depend on the progress of the Welfare Reform Bill and the finalisation of the Government’s policy which will allow local authorities to understand the parameters within which they will need to work if CTB is localised.

24. It is our understanding that the localisation of CTB is intended to come into force in April 2013. This would require local authority to design, consult, and implement a local scheme (including any changes to software and information gathering systems) within the next year or so. This is a very challenging target.

Summary

25. The localisation of CTB is a major change to the welfare system and local authorities will need as much time as possible to implement changes and design local schemes such that they work within the parameters set by the Government, as well as fitting within the framework of wider welfare reforms. In addition, the government is considering significant changes to the wider local government finance system (business rates retention), which will also be implemented for April 2013.

26. Combined, these reforms suggest that local authorities will become more financially self-sufficient with less recourse to central government funding. At present, the local government finance system does not allow local authorities access to flexible and buoyant funding streams in a way that central government has with its AME arrangements. This limits the ability of councils to meet unexpected growth in expenditure. In the future, local authorities will need greater flexibility and access to more buoyant funding sources to manage financial risk.

27. This tension, between local flexibility and meeting the challenges of centrally directed policy, underlines much of our experience in coming to terms with the wider implications of welfare reform. As with the decision to introduce a revenue-led model of affordable housing provision within the context of a capped local housing allowance, there is a concern that as government moves towards implementation, local authorities will increasingly be required to draw together and make operational sense of the combined local impact of the separate policies of the Department for Work and Pensions and Communities and Local Government.

28. By way of response, we have recently commissioned a research project designed to develop a thorough understanding of the likely impact of welfare reform on public services across London. In part, we believe this will help authorities to prepare for projected changes in demand on services. It is also hoped that a clear understanding of the cross-directorate implications of the government’s proposals might yet encourage greater policy alignment between government departments.

29. In principle, London Councils is in favour of localism and devolution, but the lack of definitive detail does not allow a firm policy position. We would welcome plans to release further information and guidance on the Government’s intentions at the earliest possible moment.

June 2011