The local welfare safety net Contents

5Sustainable funding

66.In this chapter we examine the funding arrangements for the local welfare safety net, including the implications of recently announced changes to local government finance in England. We consider the financial viability of discretionary local welfare in the longer term, including in periods of recession and in more deprived communities.

DHPs: calculation and distribution of individual allocations

67.The DWP allocates DHP funding to local authorities across GB. As noted at the outset of this Report, DHP funding has substantially increased in recent years, explicitly to mitigate the effects of welfare reforms since 2010. On top of relatively small amounts of “core” funding, local authorities receive specific allocations intended to address the effects of the LHA reforms; the removal of the spare room subsidy; and the Benefit Cap. A breakdown of the Government’s total DHP funding for 2015/16 is set out in the table below:

Table 3: Total UK Government DHP funding contribution by element, GB, 2015/16

Element

£ millions

Core

15

LHA

25

Spare room subsidy

60

Benefit Cap

25

Total

125

Source: DWP Housing Benefit Circular S1/2015

Local authorities in England and Wales can spend up to two and a half times the value of their central government allocation on DHPs by topping up from their own resources. The power to determine a limit on local authority expenditure on DHPs was devolved to the Scottish Government in November 2014. The Scottish Government subsequently legislated to remove the upper limit on local authority contributions, with the explicit intention of fully mitigating the impacts of the removal of the social sector spare room subsidy.69

68.In the summer 2015 Budget HM Treasury announced £800 million for DHPs over the course of the current Parliament. This represents a further increase in total DHP funding, to partially mitigate the effects of further welfare reforms, including lowering the Benefit Cap from £26,000 to £23,000 in London and £20,000 elsewhere in GB and further reductions to HB entitlements.70

Table 4: Total UK Government DHP funding allocations, GB (£ millions (cash terms))

Financial year

Total allocation

2016/17

150

2017/18

185

2018/19

170

2019/20

155

2020/21

140

Source: HM Treasury, Summer Budget 2015

69.In November 2012 the NAO found that DHP funding in the 2010 Spending Review period represented 6% of the total savings expected from the HB reforms over the same period. It concluded that it was “not clear” whether this was sufficient to address unintended effects of the reforms. The NAO was also concerned that the DWP had not set out how individual local authority allocations in relation to particular reforms had been determined. It recommended that the Department clarify its methodology for determining the overall level of funding and review its process for allocating funds to individual authorities.71

70.There is now a little more information on how individual local authorities’ allocations are calculated: they are based on aggregate forecast reductions in benefit expenditure, and savings to the Exchequer, from each of the reforms.72 The DWP has also placed greater reporting requirements on local authorities in relation to their use of DHPs. The latest statistics, covering the period April–September 2015, show that most authorities in England and Wales spent less than 50% of their individual allocation, but there is wide variation and some councils have used all of their allocation and topped up.73

71.Some councils are spending disproportionate amounts of money to counter unexpected consequences of particular benefit reforms. Such examples prompted concern that the DWP’s allocation methodology was flawed. DHP spending in the London Borough of Hackney, for example, slightly exceeded its total allocation in 2014/15; however, its spending on claimants affected by the Benefit Cap was more than double DWP’s allocation for that specific purpose.74

Figure 2: Local Authorities in GB: Percentage of total UK government DHP allocation spent, April 2015–September 2015

Source: DWP, Use of Discretionary Housing Payments, Great Britain: Analysis of Mid-Year Returns from Local Authorities, April 2015–September 2015, map 1

Figure 3: Local Authorities in GB: Percentage of UK government Benefit Cap DHP allocation spent, April 2015–September 2015

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Source: Work and Pensions Committee calculations from DWP, Use of Discretionary Housing Payments Great Britain: Analysis of Mid-Year Returns from Local Authorities April 2015–September 2015

Figure 4: Local Authorities in GB: Percentage of UK government removal of social sector spare room subsidy DHP allocation spent, April 2015–September 2015

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Source: Work and Pensions Committee calculations from DWP, Use of Discretionary Housing Payments Great Britain: Analysis of Mid-Year Returns from Local Authorities April 2015–September 2015

Figure 5: Local Authorities in GB: Percentage of UK government LHA reform DHP allocation spent, April 2015–September 2015

C:\Users\clarkeja\AppData\Local\Microsoft\Windows\Temporary Internet Files\Content.Outlook\CRK963OV\1601-008-map-lha.png

Source: Work and Pensions Committee calculations from DWP, Use of Discretionary Housing Payments Great Britain: Analysis of Mid-Year Returns from Local Authorities April 2015–September 2015

Figure 6: Local Authorities in GB: Percentage of total UK government DHP allocation spent meeting “other” needs, April 2015–September 2015

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Source: Work and Pensions Committee calculations from DWP, Use of Discretionary Housing Payments Great Britain: Analysis of Mid-Year Returns from Local Authorities April 2015–September 2015

72.All unused DHP funding is returned the Exchequer at the end of each financial year. Several witnesses felt this was an ineffective use of resources, as there was clear evidence of continued high levels of need in relation to specific reforms in particular areas. A group of local authority benefits and revenues teams (BenX) recommended that councils be allowed to “carry forward a fixed percentage of unspent allocation” to help manage variations in demand from year to year. It also argued that local authorities which had overspent their allocation should be allowed to bid for unused allocations from under-spending areas.75 The LGA’s view was that councils ought to be able to retain a share of the savings accrued from the benefit reforms, to “improve outcomes” for claimants.76 The London Borough of Croydon favoured a broader form of partial “payment-by-results” system—it estimated that its work with residents affected by the Benefit Cap in 2013/14 (discussed in chapter 2) had resulted in around £2.2 million of additional income tax and reduced benefits expenditure, as people moved into work or increased their earnings.

73.We recommend that the DWP review its methodology for calculating and distributing individual local authority DHP allocations, following consultation with local government, to ensure it more effectively matches funding to needs resulting from particular welfare reforms. We further recommend that this review consider the potential efficacy of a DHP funding system which rewards councils for undertaking preventative work to help residents avoid the effects of national welfare reforms, where this work ultimately returns more money to the Exchequer than the welfare reforms themselves would otherwise have done.

Use of DHPs for temporary accommodation for homeless people

74.Giles Peaker reported that some local authorities, particularly in London, were using more than half of their total DHP allocation to pay for temporary accommodation for homeless people.77 The DWP’s guidance sets out a number of ways that DHPs are intended to prevent homelessness. While using DHPs to cover the full costs of temporary accommodation for people once they have become homeless is not expressly contrary to the DWP’s guidance, it is not specifically set out as one of the intended uses.78 Furthermore, the DWP has not allocated specific DHP funding for temporary accommodation for homeless people within the increased funding allocations since 2010, as discussed above. Mr Peaker’s view was therefore that using DHPs in this way was “distorting the budget” in some local authority areas.79

75.Some local authorities are using substantial proportions of their total DHP budget on temporary accommodation for homeless people. This is not one of the intended purposes of the additional funding allocations, which are explicitly for people affected by LHA changes; the Benefit Cap; and the removal of the social sector spare room subsidy. Money spent on temporary accommodation for homeless people is therefore money which is not reaching its intended recipients.

76.We recommend that the DWP require local authorities to report the amount of DHP funding spent on housing homeless people in temporary accommodation and that this data be regularly published as part of the official DHP statistics. This will show the shortfall in appropriate funding for temporary accommodation for homeless people in some areas, which we recommend the Government, in consultation with the relevant local authorities, address as a matter of urgency.

Funding for local welfare assistance

77.A September 2014 review by the Centre for Economic and Social Inclusion for the LGA concluded that:

[…] there will always be a need for some form of crisis and community care support to be made available. […] The Government needs to recognise that there is a need to continue to provide [local authorities] with a specific and identifiable pot of funding to meet these types of needs in their localities on an ongoing basis. In the absence of this, the early indications are that local authorities are likely to reduce investment in preventative work, which may lead to greater social and financial costs in the longer term.80

78.The DWP transferred a total of £171 million to councils in England to administer and deliver local welfare assistance in 2013/14. The figure was the same, in cash terms, for 2014/15.81 The funding was not ring-fenced, but the DWP made clear that it was the Government’s intention that the funding was to be used for the new provision.82

79.It was widely expected that the Government would not continue to provide local authorities with additional funding for local welfare assistance in 2015/16.83 This followed a one-off DWP review in late 2014 which found that in 2013/14 some 80% of councils did not spend all of their funding allocation.84

80.It should be noted, however, that this review also found that underspending was at least in part due to councils’ uncertainty around the level of demand in the first year of the schemes. This had led them to take a cautious approach to granting awards.85 This finding is supported by the NAO. Furthermore, the NAO found that fewer councils (24%) reported that they would underspend their 2014/15 allocation, and some of this projected underspending was due to uncertainty over future funding arrangements; councils were planning to spend their year two allocation over a longer period.86

81.The LGA argued that ending additional funding, over and above the general central government grant to local authorities, would be “an expensive mistake which could put thousands at greater risk of losing their homes and cost the public purse hundreds of millions of pounds”.87 Following consultation with local authorities, and to help them recognise how much of their core funding related to the provision of welfare assistance, the DCLG identified £130 million from within the general central government grant and announced additional funding of £74 million for 2015/16, to “recognise that councils have asked for additional support”.88 In the provisional 2016/17 settlement, the Government identified £130 million within the baseline calculation for the core grant; however, the LGA was concerned that the £74 million added to the 2015/16 settlement had not been added to the baseline calculation.89

Transfer of financial risk

82.Dr Kenway of the New Policy Institute pointed out that a practical financial effect of the localisation of Council Tax support and discretionary welfare assistance was the transfer of financial risk from the DWP’s Annually Managed Expenditure, which is intended to be responsive to economic conditions, to the more fixed budgets of local authorities. In effect the poorest residents were now a financial burden on councils in a way they had never been before. Dr Kenway believed it was “unwise” to transfer risk from the “broad shoulders” of HM Treasury to local authorities in this way.90

Changes to local government finance in England

83.In the recent Spending Review and Autumn Statement the Chancellor of the Exchequer announced a “devolution revolution” in England; including measures which HM Treasury believes will “fix the current broken system of financing local government”.91

84.Since 2013 individual councils have retained 50% of the Business Rate growth in their areas i.e. half of the tax revenue from new businesses setting up or existing businesses expanding. A system of “growth levies”, paid by local authorities with “disproportionate potential to grow” (including several central London boroughs), was introduced to fund top-up payments to councils with falling Business Rate revenues.92

85.The key elements of the proposed changes, to be phased in over the course of the current Parliament, are:

86.The Government intends to consult with local government in preparation for phasing in the reforms. Its longer-term intention is for local authorities to become self-sufficient, through control of all local tax revenues, and better able to promote local economic growth by attracting business investment.95 Paul Johnson, Director of the Institute for Fiscal Studies, wrote:

These changes could turn out to be transformative. The ability to retain revenues from additional economic development means that for the first time councils will have a direct financial stake in local growth. It is also likely to lead to further divergence between councils in their spending power. Successful areas will benefit, the less successful will lose out. There is, as ever, a trade-off between providing sharp incentives for success and redistributing between the more and the less successful.96

87.The proposed changes initially received a cautious welcome from the LGA, which has “long argued that the current system of business rates needs to be reformed”. The total additional revenue from Business Rate retention is forecast to be £13 billion over the Spending Review period; more than the loss incurred from the proposed phased withdrawal of central government grants. LGA analysis of HM Treasury and Office of Budgetary Responsibility figures, however, shows that core funding from central to local government will be cut by 24% in real terms between 2016/17 and 2019/20. Taking into account OBR forecasts of local tax revenues, the LGA estimates an overall 6.7% real terms reduction in local authority income over the same period.97 The Government calculates that local authority “Core Spending Power”, which takes into account all sources of local government income, will fall by an average of only 0.5%.98

88.The LGA was concerned that “full devolution” of business rates would have uneven effects across unless the country unless local authorities in England can work with the Government to “get the details of the policy right and ensure that it can be introduced in way that is fair to all councils.”99 The Minister for Local Government (Marcus Jones MP) told us that there would be “clear mechanisms built in to make sure that local authorities’ funding from business rates does not drop below a certain level.”100

89.The Provisional Local Government Finance Settlement for 2016/17 announced that, for the first time, local authorities in England would be offered four-year settlements, so that any council that wishes to can “plan ahead with confidence.”101 The Chairman of the LGA described this as “hugely significant” and “an important step towards the financial certainty councils need to run important local services to the high standard our residents deserve”.102

90.The localisation of Council Tax support and discretionary welfare assistance entails a transfer of financial risk from the DWP’s Annually Managed Expenditure to the stretched and, to-date, relatively fixed budgets of local authorities. We very much welcome the Government’s innovation of offering four-year settlements to local authorities in England that wish to plan their budgets over the course of this Parliament, as potentially transformative financing arrangements are phased in.

91.The proposed devolution of business rates in England is likely to have a broadly positive effect on the spending power of local government as a whole, particularly in areas which are more able to harness local economic growth; however, it will be essential for the new system to include adequate protections for local authorities in which business rates raise relatively little revenue.

92.Central and local government in England must agree and implement an effective local government funding system which can cope with future economic downturns. In its consultation on the proposed changes to local government finance in England announced in the recent Spending Review and Autumn Statement, we recommend that the Government and the LGA consider options for counter-cyclical grants from central government and/or more affluent councils, to less affluent local authority areas, perhaps based on the Index of Multiple Deprivation, particularly during future periods of recession. In the interim period, before “full devolution” of Business Rate retention, we recommend that the Government introduce a temporary grant to local authorities with the highest deprivation rates in England, to preserve local welfare assistance schemes in areas with the highest levels of need.

69 Discretionary Housing Payments, Briefing Paper 06899, House of Commons Library, July 2015

70 HM Treasury, Summer Budget 2015, HC 264, table 2.1

71 National Audit Office, Managing the impact of Housing Benefit reform, HC 681 Session 2012–13, November 2012

74 London Borough of Hackney (LCW0030)

75 BenX (LCW0051)

76 LGA (LCW0039)

81 NAO, Local Government: Local Welfare Provision, January 2016

82 Localisation of the Social Fund, Standard Note 06413, House of Commons Library, November 2012

84 DWP, Local welfare provision review, November 2014

85 Ibid.

88 Written Statement, 3 Feb 2015, Col 5WS [Kris Hopkins]

91Chancellor unveils ‘devolution revolution’”, HM Treasury press release, 5 October 2015

92 Re-wiring local government finance

93 See Directly-elected mayors, Briefing Paper 05000, House of Commons Library, May 2015

95 HM Treasury, Spending Review and Autumn Statement 2015, Cm 9162, November 2015

96 “Get ready for Osborne’s town hall revolution”, The Times, 8 December 2015

98 Including core grant funding; retained business rates; Council Tax income (included, where appropriate the 2% precept for social care); and income from the New Homes Bonus, the Improved Better Care Fund and the Rural Services Delivery Grant. See LGA briefing on the Provisional Local Government Finance Settlement 2016–17 and an offer to councils for future years, 17 December 2015

102 LGA media statement, 17 December 2015




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Prepared 11 January 2016