Communities, Local Government Committee
Oral evidence: Business rate retention, HC 552
Monday 5 February 2018
Ordered by the House of Commons to be published on 5 February 2018.
Members present: Mr Clive Betts (Chair); Mike Amesbury; Bob Blackman; Helen Hayes; Kevin Hollinrake; Andrew Lewer; Mr Mark Prisk; Mary Robinson; Liz Twist.
Questions 1-50
Witnesses
I: Councillor Paul Carter, Chair, County Councils Network, Sheila Little, President, Society of County Treasurers, Councillor David Simmonds CBE, Vice Chairman, Local Government Association, and Rob Whiteman, Chief Executive, Chartered Institute of Public Finance and Accountancy.
II: Councillor David Finch, Leader, Essex County Council, Councillor John Fuller, Chairman, District Councils Network, Janice Gotts, Deputy City Treasurer, Manchester City Council, and Guy Ware, Interim Director, Finance, Performance and Procurement, London Councils.
Witnesses: Councillor Paul Carter, Sheila Little, Councillor David Simmonds CBE and Rob Whiteman.
Chair: Good afternoon. Thank you for coming to be with us for our first evidence session on business rate retention. Before I hand over to you, I ask Committee members to put on record any interests they may have that are relevant to this inquiry. I am vice-president of the Local Government Association.
Helen Hayes: I employ a councillor on my staff.
Liz Twist: I am a member of Gateshead Metropolitan Borough Council.
Mike Amesbury: I employ a councillor on my staff, too.
Q1 Chair: Right. Those are our particular interests relevant to this inquiry. Can you say who you are and what organisation you represent? We will go down the table.
Rob Whiteman: Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy.
Councillor Simmonds: David Simmonds, leader of the Conservatives and vice-chairman at the Local Government Association.
Councillor Carter: Paul Carter, leader of Kent County Council and chairman of the County Councils Network.
Sheila Little: Sheila Little, president of the Society of County Treasurers.
Q2 Chair: Thank you very much for coming. Obviously, there has been quite a bit of change around business rate retention in the last few months. The certainty that existed at the beginning of last year has probably been replaced by at least a degree of uncertainty. Can you tell us what your understanding is of what councils were doing and how they were planning for 100% retention when it was on track to come in during 2020-21, and how far they are now revising their plans as a result of the changes that have come about?
Councillor Simmonds: Perhaps I can lead off, and colleagues may well want to come in. We know that nationally, just over £50 billion is collected in local taxation, of which around half is business rates. That funds a wide variety of different local services. The challenge that was laid down by Greg Clark when he was working as Secretary of State was around developing a new fair funding formula, and around what the future position on business rates would look like. Certainly at the Local Government Association, there have been a number of working groups at both a technical and a political level to look at what would be involved in bringing those things forward.
It is important to be clear, from a council perspective and for the residents whom that taxation supports in all sorts of different ways, that there are lots of things that are interdependent: adult social care funding; what is going on around education funding; the funding gap of £5.8 billion highlighted by LGA that has been developing around adult and children’s social care; the proposals to localise a number of different revenue streams. All those come together, because we want to make sure that we get this right so it is on a sustainable basis for the future.
Without going into a lot more detail, technical working groups have been looking at all the different aspects of this. Those have involved officials from the officer and professional groups represented here today, from the Local Government Association’s professional body and from the different constituent parts of the district councils, county councils and London boroughs. They have all been contributing to that. We have been aiming to get a united position from local government about a funding formula that looks sustainable for the future.
The big concern we have is that there have been many false dawns when it comes to local government funding. A lot of changes have happened in the formula over the years that have then been either not implemented or not fully implemented. We need to make sure that as we try to plan for the future, we get as much certainty as possible about what will happen. Clearly, the challenge Government have at the moment, although they have laid out the intention to have 75% business rates retention, is when the 100% may be achieved and what will be involved in the localisation of that figure.
Councillor Carter: To pick up on David’s point about the uncertainty, we have only a two-year medium-term plan at the moment, and we haven’t got a clue what the position is going to be in year 3 until we have worked out what a good needs-led, evidence-based fair funding methodology and commercial rate retention is, redistributed through some form of tariff and top-ups.
I am of the belief that the current system is badly broken and very opaque, and needs fixing. This is a unique opportunity, if we can get the correct needs-led, evidence-based methodology to fund local government, superimpose whatever the mechanism is for top-ups and retentions on business, and—of course, and most importantly—marry together with the social care Green Paper on how we will fund social care over the medium term. The two are so inextricably linked that there is an awful lot of work to do in a fairly short period to arrive at what I hope will be a new, simpler, fairer model that gives every local authority up and down the country, of different shapes and sizes, the opportunity to deliver their statutory core service, with a balance being put against the council tax levels being set according to the average wealth of the area from which the populace comes—in other words, an area cost weighting on a baseline for all the council tax levels to be set as a standard.
Q3 Chair: We’ll come back to fair funding specifically towards the end of the session, but in terms of the arrangements that have been made, what transitional arrangements do councils want to see to get towards the 75%? It is a different scenario from the one you were planning for a year ago.
Sheila Little: In terms of planning for 2021, there is no comprehensive spending review covering that period, so there is an awful lot of uncertainty for counties, and indeed all local authorities, regardless of where the business rate retention and fair funding approaches are. The announcement of the 75% came out in the provisional settlement late last year. Counties and other elements of local government have been calling for truly 100% delegation and retention of business rates. The 75%, with the promise of rolling in the public heath grant and the rural services grant, does not amount to any greater a delegation than the current 50% model, because the quantum of that additional 25% equates more or less to the grants that will be rolled in to it. That switch of funding is really what the move to 75% represents.
Q4 Chair: So we aren’t talking about any more devolution of powers and responsibilities—it is simply the rolling of grants into the system?
Sheila Little: It’s a different form of funding. Instead of funding public health and rural services through grants, the proposal is to fund them through retention of business rates.
Rob Whiteman: I think that all councils welcome rate retention because, as a point of principle, it is a step towards devolution, with local government funding itself from its own raised taxes, rather than Government sucking in those taxes and redistributing them. So all councils welcome it. Councils that will benefit by rate retention—those with a high yield of business rates—greatly welcome 100% rate retention and will be disappointed that at this stage it is 75%. Councils that will not benefit as quickly from rate retention feel the need for a fair funding review to run alongside it. All councils need certainty for their medium-term financial plans, as we have heard from all my colleagues today.
The risks are that at the moment people want to know what responsibilities will be delegated with it. Sheila mentioned public health, for example. Will there be any net benefit by rate retention or will it be used to cover responsibilities that are transferred in agreement with the Treasury? There is also a risk that until people for whom this might be good news—there is a net benefit from rate retention one day—understand the detail of that, they might overly compensate in their budget strategies and not make the types of decision that they need to. We all want to avoid the risk of councils finding that they should have made other efficiencies or more savings because they banked on, or hoped that, in the medium term that retention would give them more benefit than it did. Until they know exactly which services will be covered by this on transfer, they are in a state of uncertainty, even though they welcome the reform overall.
Q5 Chair: Is that uncertainty really leading to a situation where councils may over-cut—make cuts that they needn’t make and then have to reverse when they get more certainty about the situation?
Rob Whiteman: Well, remember I am an accountant, so I am probably never going to worry that people will over-cut. I will worry that they under-cut and think that there is good news coming down the pipeline that ultimately does not deliver.
Councillor Carter: It could go the other way. We don’t know. The public health responsibility is about £5 billion, which will leave roughly £5 billion of unallocated money that the Treasury has got through the commercial rate retention for the whole of the country. It does have the capacity, if it wants to open up the taps a bit, to fund our pressures and the new responsibilities that have come without any additional money across the piece. Local government and county councils, which have had the steepest financial challenge of any part of local government, have done extraordinarily well to help national Government start to restore the country’s public finances. We are all finding now that we really are eating into the bone.
Sheila Little: Of course, part of the challenge is the timing if it is going to be in place in 2020-21. The Government, through the business rates steering board, which has been mentioned already, are working hard to get exemplifications out for what it might actually mean for local authorities. Everyone is working towards that coming out in summer ’19. The sector and all authorities wish for it to come out as soon as possible, because until you see what the numbers look like for your particular area, it is hard to know how to do the planning. A nervousness I have got is that those numbers might not become clear until quite late in the planning cycle ahead of 2020-21, which will make deciding exactly what planning decisions authorities need to take hard to do well in advance.
Q6 Chair: Before I pass over to Mark Prisk, I want to come back to the point about extra powers. Sheila Little, you were saying that there won’t be any extra powers with the 75% retention, because it simply absorbs the grants. Councillor Carter, you were saying that there is £5 billion around, which the Treasury, if they wanted, could use to help relieve some of the pressures that councils have, which have not been properly funded in the past.
Councillor Carter: Yes. We have 50% at the moment, moving to 75%, which will release another £5 billion, but the rural services grant will soak up another £5 billion. That roughly leaves £5 billion—maybe slightly more—in the Treasury’s coffers. In the General Rate Act 1967, it was suggested that all the money collected through the commercial rate charging should be spent in local government. Well, if you continue to add new responsibilities by redistributing the money that is currently held, the net sum gain for local government is neutralised.
Q7 Chair: But no one is talking to you at this stage about whether that £5 billion might remain with local government, and if so whether extra powers and responsibilities will come with it?
Councillor Carter: Correct.
Sheila Little: Well, the Government have said that they wish, in the longer term, to move towards delegating beyond the 75%, but they have not been, and I think cannot be, precise about when that might be.
Q8 Chair: But the £5 billion is part of the 75%, isn’t it?
Sheila Little: No. Effectively, there are two lots of £5 billion. It is 50% at the moment, and it is proposed that roughly £5 billion will be added to that amount to get it up to 75%, which is basically the sum of the public health grant and the rural services grant.
Q9 Chair: And then there is another £5 billion if you go to 100%?
Sheila Little: There is another £5 billion. Councillor Carter was talking about that second £5 billion.
Rob Whiteman: This is one of the contentious things for local government and the Treasury if councils are keeping more business rates—75% or 100% of what they collect. At the moment, it goes into the national pot. Obviously, the Treasury keeps half of that to fund the rest of the Exchequer. It is now going to say, “We can only keep a quarter of that to fund the rest of the Exchequer.” The Treasury’s view is that, as councils are allowed to retain more of that, it wants to transfer more services to be funded by councils so it is net neutral to the Treasury. In other words, it doesn’t want to lose its £5 billion in funding local government to have real-terms growth. The Treasury’s view is that, as councils retain more of the business rates they collect, it will ask councils to fund things such as public health, which before now were funded by the Treasury. I hope that makes sense.
Councillor Carter: And funded by the efficiency savings that have come out of local government by substantially reducing the revenue support grant to virtually zero.
Councillor Simmonds: I think it is worth saying that the value of the exercise around business rates and fair funding is neutralised if it is a zero-sum game. If we are in a situation where local residents—your constituents—are clearly saying, “We want to make sure that we preserve and enhance local services that we value,” and we know that there is a funding gap around it, simply localising the cost and the funding on a like-for-like basis makes no difference. So we are arguing for a look at this funding formula that makes a difference to the way that it looks and feels to your constituents and the residents that we serve.
Q10 Mr Prisk: Can I drill down a bit on the retention and your ability to plan ahead? What difference has the confirmation of 75% retention made, particularly in terms of financial planning through to 2020-21?
Councillor Simmonds: I think that there are a number of uncertainties. The old phrase about the known knowns and the known unknowns probably comes into play. The first question is clearly what additional responsibility may be coming local government’s way over that period. The second is around what may emerge from the Green Paper, in particular around adult social care, which is probably the biggest single area of financial pressure, although children’s services runs at a fairly close second.
The big challenge for local authorities is that the confirmation, with the uncertainties around it, does not make a huge difference in practice for our finance officers. For an authority that is already relatively well funded and relatively financially stable, like my own, we are putting money aside in our balances because we know that it will be difficult, but just do not yet know exactly what form the difficulty will take. For those councils that are closer to the edge financially, it is clearly much more difficult to plan. If you do not have sufficient leeway—if you do not have the things left to cut that Rob has referred to—putting that money aside for that rainy day, which you know will emerge in one form or another over the next two to three years, is much more challenging.
It is progress in the right direction that Government have given that commitment in principle, but in practical terms does it give the section 151 responsible officers of local authorities a reassurance that they now do not need to worry? No, it does not.
Sheila Little: To add to that, it does not remove any of the uncertainty, so it is not really making any difference to the longer term planning. That word “uncertainty” always makes us 151 officers think that we need to be cautious and prudent. There is a risk that any increased uncertainty actually makes us all think that we need to hold a little bit more back than we might otherwise have done for those rainy days.
The switch in the source of funding for the public health, which is essentially what we are talking about, is of concern. The funding source will become business rates, and the rate of growth of business rates is not in any way correlated to the service need to provide the public health service. That increases the uncertainty for authorities, in that the funding is not linked or correlated to the demand for those services.
Rob Whiteman: I think everything that has been said is right. It is good that there is certainty that it will happen; however, there is complete uncertainty about how it will happen, and therefore for councils’ financial plans there is not enough real certainty yet for them to set out for members the type of difference that it will make in the medium term and to make different plans accordingly. So as everyone has said, it is definitely welcome to go in that direction, but there is a lot left to be worked on regarding the detail about which responsibilities will switch, for example.
Q11 Mr Prisk: Councillor Carter, thinking about those in terms of the 100% and looking a bit further ahead to stage 2, are authorities in a position to start to be clearer about their outlook, or are the more immediate hurdles their main preoccupation?
Councillor Carter: Within the 100%, or indeed the 75%, there are so many unfunded pressures that are building up across the piece in local government. Those are particularly in people-based services, but there are others, such as the pressure on wage settlements and the unions demanding a 3% plus pay award for local government. There is a whole list of pressures building up that we are having to absorb while at the same time having the revenue support grant diminished virtually to zero in the counties’ case, with some in negative RSG. Is there going to be an acceptance that that cannot go on forever, and some additionality given out of the Treasury’s headroom to fund those significant demand-led pressures that we have no alternative but to deliver? Adult social care and children’s services would be prime examples of that. The elastic is fully stretched.
Q12 Mr Prisk: Perhaps I can follow on from that. If there is a longer implementation period, which we now have, in an ideal world, what should the priorities be in designing that new arrangement?
Rob Whiteman: I echo what Councillor Carter said. The pressures are really building up for councils. A lot of councils say that although our elderly population is rising and we know that we need more elderly care, actually we know the scale of that now and the models generally work. Councils see huge uncertainties with regards to children going into adult care. People see quite large uncertainties and swings in their children’s services budget. The pressures of the sector are often described as being just around adult care, but that is not the case. There really are strong pressures building up on councils, such as those represented today.
Will that get addressed by the way the Government set out transitional arrangements? As Sheila said earlier, a probable end point—if you will all bear with this—is that business rates might not be the best way of covering these pressures on their own. That is because business rate yield is by nature a property tax on businesses and the yield may follow the economic cycle a little bit, but in a way that some of the pressures we are talking about today—such as care for the elderly, for children and for children going into adult care—are not on the economic cycle. With regard to setting out transitional arrangements and the role of the fair funding review, how will areas of need, which are not necessarily reflected in their base, be reflected, in order to deal with these pressures? That is absolutely key. The LGA is doing a huge amount work in pulling together views from the sector, but the element of the fair funding review, on how distribution will work in a retained system, is where the transitional arrangement will be absolutely key, as well as the full arrangements themselves.
Q13 Mr Prisk: Before I ask others about that, in my mind what you have described suggests that the fair funding—if you like, the counterbalance pot of money—needs to be larger, because of the greater mismatch between the nature of business rates revenue and their ebb and flow or, at a local level, if there was a major company collapse in a particular town, rather than the current arrangements, where there is a broader range of tax revenues that are generating sums to pay for public services. Would you say that that is one of the design elements needed?
Rob Whiteman: We would hope that the Treasury will allow some extra quantum in the pot here and that it will not just be a zero-sum game, and that fair funding would have some extra quantum in the pot to help fund these services.
Q14 Mr Prisk: So we need an extra quantum.
Sheila Little: We do need an extra quantum. When the Government first talked about 100% business rates, they talked about additional new responsibilities to go alongside those. That has slightly changed over time and now the talk is to move to 75% with some additional responsibilities, except that it is not really additional responsibility; it is just a change in the source of funding. The sector is calling for that final 25% to be allowed to be retained, but without any new responsibilities, so without either taking away any funding from any other sources of grant or giving new responsibilities.
You asked about the key design criteria. There are two aspects to that, for me. One is looking at how you assess the level of resources. Council tax is probably going to be quite a key element in this. Ensuring that council tax is factored in on a notional level, rather than an actual level, would be a key priority for many authorities, because it is actually an accident of history and local decision making what the actual level of council tax is in any one area, rather than it being a true reflection of the tax base of an authority.
The second aspect is about the needs of an area. So the four-block model that we all love has been well discredited, if you like, over time. Actually assessing the true cost drivers of the services to be funded by local authorities is really important to get right. I know that the Ministry and local government and the sector are working closely and the consultation that is out now is focused on those cost drivers. Getting those right, and the weightings of those, is absolutely critical to having a fairer system going forward.
Q15 Mr Prisk: When you say that we have to be more focused on the notional than the actual, is that about more flexibility around banding? What does that mean in practical terms?
Sheila Little: It means that when the Government are working through how many resources an area will have, they look at a standard level of council tax for each authority, rather than focus on what a particular authority actually has, because a particular authority’s level of council tax will reflect historical decisions, over the last 20 years—the decisions they have actually made.
Councillor Carter: The variation in council tax levels between county councils and other parts of the country, particularly London—in parts of London, not all of London—is enormous. I will probably get kicked by David on my right, but some inner London boroughs are setting council tax levels at half the level of the average of the county shires. That has been a historic anomaly that I think, in the interest of fairness, needs addressing with transitional implementation of some description, to take out the massive skews that that would deliver if it was implemented quickly. But that is an example of the unfairness, in my view, of the current system, and that needs addressing.
Also, the current system for redistributing 50% or 75% of commercial rate back to local government is highly complex and needs simplifying. I think that needs to be done, because the complexities of it are such that it is opaque, and it all reflects back on having a new cost driver model of evidence-based fair funding methodology to fund all component parts of local government. I believe that the commercial rate should be pooled by the Treasury. We need to have a mechanism that incentivises business growth, and something more akin to the new homes bonus, where you can keep the business growth in your locality for the first three or four years, and then it goes back down to zero and works on a sort of moving schedule; that would be one way—but the council tax level being set appropriately and fairly, and a redistributed revenue support grant that is based on a more simple mechanism of redistributing what I would hope to see is the 100% business rate redistribution, and takes account of the enormous number of unmet pressures that we have touched on already this afternoon.
Councillor Simmonds: Just to bring it back to some of the day-to-day realities, the quantum point can be quite an obscure one, but if we look simply at children’s services, which is a responsibility of county and top-tier authorities, there is now a new child protection inquiry in England every 49 seconds. The rate of referrals has doubled in the last decade as the population has grown, and that is not reflected anywhere in the way that funding is distributed. That is a real and practical example: local authorities are fulfilling a reasonable national expectation that we will be better at investigating concerns about the welfare of children, but it is not free to do that. Staff—professional staff—have to trained and they have to be paid. They have to be sent out to do that work. Court cases will follow and those have a cost attached, and that needs to be reflected in that.
Just on the point about growth, I think this is something we have had a lot of discussions about with colleagues in the Ministry. There have been attempts at that in the past: there was a thing called LABGI, the local authority business growth incentive, which my two professional colleagues are chuckling at. One of the big challenges around that is that the funding attached to it has been very short term, so there have been a number of initiatives whereby local authorities that were delivering business growth, which is a positive for the country, were incentivised, but the return from that, as a local authority, was generally extremely small and extremely short term. What Paul Carter outlined is absolutely the way forward. This needs to be longer term.
If you are an authority going out to say to your residents, “You are going to need to put up with more traffic, more people at the station when you go to work in the morning, more people on the bus on the way to work and more housing,” you need to have a share in the value that that growth generates, and you need to see it spent locally. At the moment, too much of it disappears into a central pot, so people can’t feel in a practical way what they are getting for all the extra things they are putting up with. That is a really important part of engaging residents with the growth agenda.
Q16 Mr Prisk: So there is an equivalent of planning, gain and money, in a sense. You are able to see where the impact lies and where the benefit for the community rests.
Councillor Simmonds: Yes. We have seen a lot of debates in Parliament about housing. The challenge is that a lot of Members of Parliament are keen on extra housing, but not on the field that their residents don’t want built on. I completely understand that, because residents say, “We are going to lose this view and this green space that we have always enjoyed. What’s in it for us? More traffic on the roads, more congestion and more crowds on the public transport to and from work.” If people think, “I am going to lose that green space, but I am going to get a benefit that I, my children and my relatives can feel in their day-to-day lives,” that will make a big difference. That is about visibly spending a larger share locally.
Q17 Mr Prisk: Thank you. Can I just come back to Councillor Simmonds on a more practical note? In your view, how are the working groups with the Government operating, in terms of the implementation of the retention? Are there any commensurate legislative changes that you want to see following that discussion?
Councillor Simmonds: There are a number of crunchy issues that emerge from it. There is a steering group, which is supposed to give an overview. There is a technical working group, which looks at things like how the needs assessment is generated and how it is revisited on a regular basis, because we recognise that councils do not all start from the same place. Manchester is a very different context from inner London, which itself is a different context from rural Kent or north Yorkshire. We need to make sure that is kept up to date.
There is a working group that is looking at system design, which includes things like the treatment of appeals, which has been a significant concern. Take the example of West Somerset Council, which has been very much in the media and is home to one of the largest infrastructure projects in the country—the new Hinkley nuclear power station. The outcome of a business rate appeal landed that very small local authority—the smallest local authority in England—with a requirement to repay overpaid business rates, most of which in the past had actually gone straight to the Treasury, not to the local authority. A single decision like that—it is an outlier, but it is an example of what councils may be dealing with—can have a massive impact of the viability of local services. Clearly, there is a need to make sure that is operating effectively.
There are two further groups: accounting and accountability, and one that is working on responsibilities. The accounting one, as you would imagine, is primarily focused on the practical accounting arrangements and the governance around them. The responsibilities group is looking, in particular, at what is happening around the devolution of responsibilities and the debate about what conditions might be attached to the localisation of any additional funding.
The important thing to say is that all those groups bring together the LGA, the treasurers’ groups—organisations such as the Society of County Treasurers—and constituent bodies representing the different types of councils. The aim of that is to try, as far as possible, to cut through the differences that inevitably arise between different types of authorities and come up with a single, coherent local government view.
Q18 Mr Prisk: Thank you. That answer suggests that you don’t see any particular need to bring back parts of the Local Government Finance Bill, for example.
Councillor Simmonds: It is always going to be a very difficult challenge to answer that, because of the caveats we have all outlined. It depends on the outcome of the work that is going on around adult social care funding, and of the work that is looking at which elements of business rate retention would or would not sit on the central list. All of those things would have an impact. Clearly, if it gets to the stage where it is clear that a legislative boundary needs to be crossed, and that it cannot be dealt with within existing regulations, Ministers would need to take it forward.
Mr Prisk: Good. Thank you very much.
Q19 Helen Hayes: You have touched on the issue, but I want to ask more directly whether you have concerns that there is, with the proposed arrangements, a fundamental disconnection between the drivers of demands on local authority services and the drivers of economic growth, which will generate the funding in order to meet those demands. It is not only about demand for services being non-cyclical; it is about the fact that they are completely different things. In many parts of the country there might in fact be an inverse relationship between the populations that have very high numbers of older retired people and an ageing population and areas of the country that find it harder to grow their local economy. Are we not just talking about a system whereby the redistribution requirements will become every bit as complex as the system that we currently have?
Councillor Simmonds: Paul made the point very powerfully that it is a system that has been patched up for too long. It is therefore not working for too many local authorities. Local politicians have done a great deal, supported by their professionals, to make it work and to keep that particular show on the road, but clearly the challenges are getting more and more acute.
A couple of things that you said are absolutely spot on. One is quite interesting. The LGA did a briefing about a previous local government finance settlement and discovered from a collected group of expert journalists that it was not aware that councils did not all get the same amount of funding from central Government. It assumed that differences in the levels of council tax were entirely down to local political decisions and therefore the reason why Kensington and Chelsea is cheaper to live in than Kent is because it is a super-efficient Tory borough, not because it gets hundreds of millions in additional Government grant. That is a microcosm of a wider challenge.
Places that have the biggest cost concerns around adult social care and children’s social care are frequently places that also have a low council tax base. The freedom to raise additional council taxes does not generate the revenue that it might need to. Taking London as an example, with 33 authorities of different sizes, when the 2% adult social care precept was introduced, the council with the highest council tax base in London, which is Richmond, would get a net additional 1.8% for its budget. For that with the lowest council tax base, which is the City, it would be 0.02%. For the same policy implemented in the same way for all of those authorities for the same purpose, that was the extent of the difference between them.
Q20 Rob Whiteman: I think the stakes are very high at the moment. Some of the things we have all spoken about today have been kicking around local government finance for a long time. There is an inherent problem, in that we would all like to see as much retention as possible because it makes the sector more self-sufficient in its resources, but that does not necessarily correlate the areas that can generate their own taxation with where need lies. Of course, because councils have lost so much of their resources since 2010, the stakes are now very high indeed. CIPFA’s long-term view has been that we hope that a future Government—I don’t think this will happen in this Parliament—will set up an independent commission. It would be rather like a Bank of England moment—rather like when setting interest rates was given to an independent body.
Over my career, I have seen Governments of the day make technical decisions on distribution that tended to favour councils of their own political colour. No disrespect to any political audience, but on the whole, when it comes to concepts such as simplicity versus fairness, “fairness” means “we try to address need, and so have a distribution system that may help authorities that cannot generate their own resources”, and “simplicity” tends to be code for not helping councils in need as much, and trying to have a simple, more transparent formula that assists councils that generate their own resources. This code language has been going on for 20 or 30 years.
The stakes are very high, given the huge service pressures. My hope for the fair funding review is that the Government will be as transparent as possible, so that the options they consider on distribution are fair and equitable to all councils. At the moment, there is not much space left to do otherwise. I hope that the Treasury greases the pot, or whatever the right expression is, allowing more money into the quantum from the total amount of rates collected, so that the fair funding element of this can help councils that do not generate resources to cover their service need. The issue that has never been worked through—you could probably discuss this all day, Chair—is: what is driven by need in an area, and what is not? This is a long-standing debate. Is the cost of collecting your bins really something that can be drawn but covered by local taxation, because it should not vary from area to area? On the other hand, the cost of looking after children in care will vary considerably by area, according to the complexities of society in that place. These issues have been kicking around for a very long time.
My advice as the chief exec of CIPFA would be that the stakes are so high that the unintended consequences of treating some councils unfairly in the arrangements that are put in place could be dire, as regards the impact on services. In the past, in some parts of my career, it was more a matter of who got more growth. The stakes are bloomin’ high, and a lot of councils are really struggling with their finances.
Councillor Carter: There is no direct correlation between economic growth and the demand for social care—both children’s services and adult social care. That is why I favour a simpler model that pulls all the commercial rates and redistributes it to local government based on a fair, needs-led, evidence-based, as-simple-as-possible, fair funding methodology. That does not mean to say that local government does not have a massive role in setting an environment that is conducive to the economy in our areas growing.
Q21 Mary Robinson: I am sorry for missing the first few minutes of the sitting. I am interested in the dynamic between where we are now with devolution and the possibility of an independent commission. We have waited a long time to get to devolution. It has, for years, been called for. In Greater Manchester, we are part of the pilot for 100% business rate retention and the integration of health and social care, so quite a lot is happening. Are you suggesting, Mr Whiteman, that there should be another change, and that we should move away from devolution towards the “more central interference” model that we had before?
Rob Whiteman: The change that I would hope to see one day is regional devolution in England being similar to devolution within the nations of the UK. If the Scottish Government can vary income tax or corporation tax to fund services in Scotland, why can’t the Mayor of London or the Mayor of Manchester have access to varying income tax or corporation tax, according to the plans for that area? The problem is that local government is being funded from a very narrow tax base. Over time, devolution will mean a wider transfer of responsibilities and a plurality of funding that goes with it. That is what everybody in local government would one day like to see. At the moment, how is this tiny stepping stone towards devolution of rate retention and fair funding carried out in the most professional or equitable way possible to deal with the strains on services?
Q22 Kevin Hollinrake: I am sorry I missed the start of the Committee hearing. Mr Carter, you would rather see not business rates retention, but a centralised system where the money comes back into the centre and then is redistributed according to need.
Councillor Carter: And 100% goes back out to local government, in the way that was intended in 1967.
Q23 Kevin Hollinrake: Isn’t that effectively the intention with this policy, though?
Councillor Carter: Yes, but it is still using some of the old, historical methodologies for doing that, with the tariffs and top-ups. If you spent two hours learning how complex that system is—is there a better, simpler way to do it? In my view, yes there is.
Q24 Kevin Hollinrake: We are agreed on the need for a fairer funding formula for distribution, but you just do not like the way that it is retained, and then there are tariffs and top-ups. It is too complex.
Councillor Carter: And it’s very opaque, so it has ended up with a distribution of revenue support grant, historically, that is all over the place, to come back to Rob’s point. That is why some authorities, irrespective of how efficient they are, can deliver a council tax 50% lower than that of the county shires.
Q25 Kevin Hollinrake: In a word, is everybody else of the same view?
Councillor Simmonds: It is a very good summary of the problems with the system. I am slightly more positive about the direction that we are going in. There is the sense that the Government is on side with the point that the funding formula needs to be fairer and easier to understand. We have taken some positive steps in that direction. I think the professional and political lobbying around that has been positive.
From the perspective of residents, the big challenge, of course—whether the issue is the way that your bins are collected, the local schools, or the state of the local roads—is that that is the place where you live. Most people do not live in seven or eight different places, and spend their time comparing the levels of council tax. There are lots of different things: the rate of referrals for child protection, the number of frail elderly people, and the number of adults with learning disabilities. The variation that that creates, which is easily two thirds of local government spending, but most of which is not very visible to your average resident, is the challenge that we have to get right.
Councillor Carter: Chairman, I missed something out: there should be a system that incentivises economic growth in the area, akin to the new homes bonus. I left that bit out.
Q26 Mike Amesbury: What are your priorities for the fair funding review?
Councillor Simmonds: Fairness is a term—Rob alluded to this—that means different things to different people. One of my priorities, and one of the things that we have set out to do for the LGA, is achieve—as far as we can, cross-party, including independent members—agreement on what the elements of the funding formula should be. That includes obvious things: numbers of frail elderly people, sparsity—the challenges that that throws up can be to do with things such as having ports of entry—the usual indices around deprivation, of which there are a variety that come into play, and points such as the one that Paul mentioned around the income level in the area.
For me, the key thing is to achieve something that, broadly speaking, as a country we can look at and say, “It may be a bit complex in some areas, and there may be areas that we will have a debate about, but broadly speaking we all agree that it is a fair way of divvying up that cake.” I do not think that we will achieve complete and total agreement on that, not least because councils do all sorts of things. Parking revenue accounts are a really good example. Councils such as Westminster raise something like £100 million in the parking revenue account, whereas in other parts of the country, parking is a net cost to the local authority. How that spending impacts the local community is clearly quite significant.
Around the things that are national priorities and are substantially nationally mandated, such as adult social care, children’s social care, and the way in which we handle waste, recycling and transport, we need to try to achieve a funding formula that we all look at and can broadly agree is a fair way of distribution.
Sheila Little: If I may, that funding formula needs to be more futureproof than the current formula, which is very much based on old, historical data. If we were to do a straw poll of social-care-responsible authorities at the moment, probably all of them would indicate that children’s services are their biggest pressure right now. You can easily get instances of hundreds of thousands of pounds a year being spent on placing one child in a placement. In the new world, looking forward, funding will come through business rates. There is absolutely no correlation between business rate growth and that sort of pressure. The trends are changing really quickly in all authorities, so we need to make sure that the core data that the formula is based on is not out of date almost before it is even implemented.
Councillor Carter: If I may, the consultation from the MHCLG—if I have the nomenclature right—is most encouraging. I think they are focusing on the right areas, and trying to keep it as simple as possible. Of course, it is the weighting that you put on each component part of that that will skew the figures one way or the other, but that has to be based on evidence of the unit cost of delivery, and the number of people over 85, 65 and so on. The costs are, crudely, directly proportional to the age range of the people you are dealing with in elderly social care. Of course, then you have adult learning disability, which is now in many counties a greater proportion of the social care budget than looking after the elderly and frail. It is a moving picture, but I am encouraged.
Rob Whiteman: I think it would be very helpful if the Department gave a running commentary on the options that it was considering—on which criteria it is minded to use. Sometimes, of course, Governments like to keep things a little bit secret, or make a nice big announcement, but then there can be unintended consequences. If the Government let the LGA and others know the options they are looking at in a transparent and open way, so that through consultation they can get comments to iron out unintended consequences, that would be very helpful.
Obviously it would also be helpful to have a discussion, where there are incentives in the system, about what will happen on reset. Every now and then, there is a reset, so that the system balances itself again to start a new set of incentives. As we have heard today, sometimes past decisions can still be a feature of the system 10 or 20 years later. I think resets will be very important.
Q27 Mike Amesbury: In what way, if at all, has the longer implementation period of the review been beneficial?
Councillor Simmonds: From an LGA perspective, the fact that this is taking some time is clearly an opportunity for greater reflection on the way in which the policy is implemented. As a practical example, look at children. We know that the best investment you can make is the money you spend from nought to five, which makes a bigger difference than the money spent at any subsequent time in a child’s life in school. But who are the loudest voices in the debate about where money is spent in education? They tend to be headteachers of large secondary schools. The more opportunity we have to ask for the evidence that shows that we get best value as a country from spending money in one way rather than another, the more opportunity we will have to do this in a way that is genuinely in the country’s long-term interests.
Going back to Paul’s point about adults with social care needs or learning disabilities, the debate around social care has tended to revolve around frail elderly people, but in fact the largest growing pressure is around adults. Someone who leaves local authority services at 18, going into adulthood, is likely to be using those services for the whole of the rest of their life. That is a very significant cost to the budget—sometimes in excess of £1 million a year for one individual.
We need to make sure that we have a mature discussion about this. There are things that Parliament legislates for that people are entitled to expect. As local politicians, we want to fulfil those expectations, but we need to make sure that the funding is properly considered and put in place.
Councillor Carter: We also need to consider what is going to be in the Green Paper on adult social care, and what the changes to entitlements may be. If the thresholds change fundamentally for being able to access state-supported domiciliary care provision and so on, my answer to your question will be, “It’s a good job we haven’t worked out a whizzo-bang formula”, because suddenly a massive grenade will have gone off. It will mean having to superimpose a new method of funding social care on those potentially changing entitlements.
Sheila Little: The Government already have 100% business rate retention pilots in place in some areas, and they have recently announced another 10. In the long term, that may lead to authorities having three different levels of business rate retention in three years. You could be on 100% in this coming financial year, then drop back down to 50%, and then when retention is introduced at 75%, it will be different again. That cannot be helpful for long-term financial planning.
Q28 Liz Twist: Quite simply, we are talking about the fair funding formula, which is really about how the cake is shared out. Do we need a bigger cake?
Sheila Little: Yes.
Rob Whiteman indicated assent.
Councillor Carter indicated assent.
Councillor Simmonds indicated assent.
Chair: We’ve got agreement on that.
Rob Whiteman: Fair’s fair: local government has really borne the brunt of savings in a way that, as Councillor Carter said earlier, other parts of the state, in the broadest sense, have not. The difficult choices that councillors up and down the country have made to balance the budgets probably could not easily have been repeated in other public services. Fair’s fair to local government. My word, it has taken some savings, compared with other bits of the state. It has reached a point where it will become untenable for a number of councils in the coming years.
I am an accountant, so I think spending money is a bad thing on the whole, but we would all agree that the quantum is undoubtedly a problem for the sector. In two or three years’ time, by the time we are into a decade of quite significant cuts, you will start to get unintended consequences locally from those services having not been available for a while. Genuinely, it is getting very tough for local government.
Sheila Little: There are real market challenges as well now. Increasingly, across authorities, providers of social care services—for adults and children, and learning disability services—are actually saying “No, we don’t want to be in the market of delivering public services any more, because you are not giving us appropriate inflationary increases.” The market is just drying up, and that is a real worry, because that puts even more pressure on those that remain in the market.
Q29 Kevin Hollinrake: Going back to the overall quantum question—Liz’s question—the point was made that there is no correlation necessarily between business rates growth in an area and its adult social care need, for example. There is also not necessarily a correlation between that nationally, is there? So if you are talking about business rates retention—money going into the centre at 100%, and 100% coming back out—you still might have an imbalance between need and quantum.
Councillor Carter: So pool it and then have a good funding methodology, and get it out the door to fund local government—100% of it.
Q30 Kevin Hollinrake: But if half of us end up being in need of adult social care, for example, and business rates is only a little bit, you are still going to be massively underfunded nationally.
Councillor Carter: Yes, but my argument is maybe needs must, but the Treasury is trousering a significant proportion of the business rate haul, to help preserve the public finances of this country.
Rob Whiteman: I think you are right. I think quantum is needed because of the exigencies of where councils are with their savings. You are of course quite right that even if the quantum is bigger, ultimately local government in England, compared to local government in other parts of the world, actually needs more plurality of resourcing. In other words, it needs to raise its money from a wider range of ways. Tourist tax would favour one area; it doesn’t favour another. Being able to have the benefits of stamp duty would help one area; it wouldn’t help another. At the moment, these couple of taxes—business rates and council tax—are the only show in town. It isn’t the proper way to fund the state locally into the medium and long term.
Q31 Chair: Two points. There is a tension, isn’t there, in the proposals, between rewarding economic development and helping councils who have got greater needs and less ability to embark on that economic development? Is it possible to resolve those tensions in one system, or do we almost need a residual RSG left, to help deal with these issues of high need in some authorities that haven’t got the ability to raise money through business rates in their area? That is what the Committee looked at and suggested when we made our interim report in 2016.
Sheila Little: The tariff and top-up system is all about the redistribution, isn’t it?
Q32 Chair: It is, and it is opaque, as Councillor Carter said; that is the problem with it.
Sheila Little: Yes it is, but that is how at the moment there is some equalisation and redistribution of it around the country, and that reflects the assessed level of need in a particular area. That is what I was saying earlier. It is absolutely vital that that assessment of the need in an area is reviewed and is correct and futureproof. Otherwise, that redistribution will be skewed.
Councillor Simmonds: This is what politics is for. It is no more impossible than it is for Parliament to resolve the conflicts between defence spending, education spending, the NHS and transport. The decision on how much money is going to be allocated has to be made within the resource envelope.
I think one of the big challenges that we have is that the UK is incredibly centralised in the way that it does this. If we look at the UK, the figure for public expenditure that is controlled by central Government is something like 74%. For Germany it is about 19%, so the ability of local authorities to get on with the job that they are tasked with is massively constrained by the way the funding environment works; and Rob has touched on some examples of this. We have a very tightly controlled system. If we look at the ability to deliver things like rail electrification, frankly if that were a decision of local government, I suspect we would have built the damned things decades ago; but because it is something that has to go through a very centralised money-crunching process, it is always being reviewed. It never quite gets implemented.
The same is true of a lot of the sensible initiatives taken around local government funding. Even if the cake does not grow, the very fact is that as local authorities, you have a bit more capacity to redistribute that within your systems to reflect changing local priorities. Paul and I share our pain around the cost of building school places at the moment, because we are both from areas where we are having to put massive resources into that because of the vast growth in the numbers of children. Twenty-five years ago, my council was closing schools and selling the sites because there just were not enough children to make those schools viable, so we know that times do change, and challenges change.
If everything is centralised, there is always a central-local tension about how that money is devolved, whereas if, as Rob has described, you have a much more independent, plural system for funding it, you can ride those challenges out much more easily.
Q33 Andrew Lewer: Based on that, would you say that a more coherent, streamlined local government system of recognisable areas that had much more authority and therefore less overlap between tiers would be a helpful way towards greater local autonomy?
Councillor Simmonds: If I was sat in the Treasury, looking out at local government, I would see quite a crowded landscape, and a landscape that has become more crowded. We have seen the implementation of city mayors, and devolution deals with a patchwork of different powers and responsibilities. That is relatively new to the UK. I made the comparison with Germany: the structure there, which was largely set up by British local government lawyers after the second world war, is one that has remained broadly unchanged and is widely accepted and understood, so there is a challenge.
It would be tempting to say, “Let’s come up with what we think is the perfect size for every local authority, and implement that across the whole country,” but when the big local government challenge becomes the provision of school places, and suddenly you need scale and leverage to get access to the resources to build those affordably, you might need a slightly different sized local authority from when it comes to co-ordinating bin collections. I would not go down the route of saying that there is scope for “one size fits all.”
Rob Whiteman: I would reorganise local government, because we often operate on Victorian footprints that do not reflect the way that services are now delivered. I was a London borough chief executive, and when London boroughs were formed 50 years ago, we tended to foster all the children within our borough and we tended to put them into care within our borough. Now, most London boroughs are putting children into care in Kent or Essex. In other words, the footprint for service delivery is fundamentally changed, and I think we are operating on footprints that do not reflect that.
I also think that if the future of local government is plurality of taxation, I could vote for the Mayor of London to change my income tax in a way that I might not easily vote for a smaller unit of government. A huge amount of overhead is taken up in the present structure, and personally I would move to bigger unitary authorities—bigger even than county in size. I would move to regional authorities, but double devolution should go both ways, with what should happen at parish level. How should you be very local?
Although my fellow former London borough chief execs do not like it when I say, “You don’t need 32 London boroughs”—which you don’t—on the other hand, London is a couple of hundred places, and you do need that sort of very local sense of being able to do things at community level. But the scale of local authorities could be changed. Lord Heseltine has often said that if you have powerful regional mayors, it is harder for Government to stop the devolution of other responsibilities and access to other services, and in a way, with the election of Messrs Street and Burnham and so on, we will see whether or not we will see more powerful regional mayors who demand more devolution in a way that local government has not been able to.
Q34 Andrew Lewer: Doesn’t Lord Heseltine also say that he wants big regional figures to come to Whitehall and beg for money? Isn’t that a fundamentally flawed concept of localism?
Rob Whiteman: I haven’t heard that bit of his argument. I have heard the piece that regional mayors should demand more powers, and I think that is a very cogent argument. When local government was building power stations and sewers and lots of the infrastructure that we now take for granted, it was through large municipalities with access to borrowing and funding.
Councillor Carter: Look at the evidence—it is telling you something.
Councillor Simmonds: Just to add to that, Andrew is absolutely bang on. I know, as a council leader who pursued this route, that we can get hung up on the structures—the name of the council—but many local authorities share what they do. Things such as trading standards in London are widely shared services. Fostering and adoption are widely shared services. Although they may be badged as Hillingdon or Barking and Dagenham, they are actually not run by an individual manager in every authority; there is one manager who does it for all of them.
Q35 Chair: Finally, to put you on the spot, we have seen publicity over the last few days about Northamptonshire and the decisions they have taken there. Are you aware of any other local authorities that are in a similar position or are approaching a similar position?
Rob Whiteman: Not in this financial year. I think Northamptonshire will be the only council in a 114 position before 31 March. I think there are other councils that may find themselves in a very difficult position in the next year or so.
Councillor Simmonds: As the recipient of the last 114 notice to be issued before Northamptonshire, nearly 20 years ago, I would say of the experience that it is designed to address a specific financial issue in an authority, so there are a variety of circumstances in which one might be issued. We all recognise that local elected members wrestle with some very difficult challenges. There are some, particularly among the counties, that have some particularly significant cost pressures stemming from the set of responsibilities that they have, which put them in a uniquely difficult position.
However, I think Rob and his professional colleagues are clearly working very closely together to alert each other when they have concerns about that. The LGA provides a lot of support to help those elected members and officers to make the best decisions that they can in the light of the pressures that they face.
Councillor Carter: There are others getting close to the cliff edge, but as yet they are still surviving. I said earlier that the diminution, at the rate it has been—in driving further and further efficiencies—has to come to an end. Some of the extraordinary unmet pressures we are having to deliver alongside that is just impossible; the maths do not add up.
In my view, Northamptonshire has been penalised by being a low council tax authority for 10 or 12 years. When you start to put council tax caps on, you find that they are in an impossible situation. If their council tax level was at the average of the county shires, they would probably have about £25 million more every year to spend.
In Kent, that would equate, proportionally, to about £45 million. Could we have survived if we had £45 million less in our revenue budget? We would be teetering very close to the edge, or diminishing and culling services left, right and centre that are highly valued by the public we serve.
Sheila Little: Certainly, going into the next financial year, more counties—I am familiar with the counties specifically—are using reserves and the capital receipts flexibilities, as I know Northamptonshire has done and that the Government allowed in this settlement from 2016-17. More are using those one-off measures to balance the books going into 2018-19, which I think is a signal.
It is not surprising; funding has been reducing enormously over the last few years at exactly the same time as demand pressures on adult and children’s services, and school places, as was mentioned in particular, have gone massively up. All of that is also in the context of a great deal of uncertainty about future local government funding.
Chair: Thank you all very much for coming to give evidence this afternoon.
Witnesses: Councillor David Finch, Councillor John Fuller, Janice Gotts and Guy Ware.
Q36 Chair: Thank you to our second panel for coming to give evidence to us this afternoon. Could you please go down the table and say who you are and the organisation you represent?
Councillor Fuller: My name is John Fuller. I am leader of South Norfolk Council and chairman of the District Councils’ Network. I am also the lead member for the Conservatives at the LGA on finances and resources.
Guy Ware: I am Guy Ware, the director of finance, performance and procurement at London Councils, which represents the 32 boroughs in the city.
Janice Gotts: I am Janice Gotts, the deputy city treasurer for Manchester City Council.
Councillor Finch: I am David Finch, the leader of Essex County Council.
Chair: Thank you all for appearing before the Committee.
Q37 Liz Twist: Can I start by asking what financial plans your councils made for ’20-21 on the basis of expecting 100% retention, and how have you had to revise those plans in response to the delay in implementing the further business rates retention?
Councillor Finch: Shall I answer first, if I may? In summary, we have not built 100% business rates retention into our projections. The simple fact is that we do not have enough information about the scheme, how much it involves, how it will be distributed and what responsibilities, if any, will be devolved. Our financial planning is built on what we know about our income and what we know our expenditure trends are. What emerges from this, for us in Essex, is a huge gap—something in the order of £94 million in ’20-21.
We are, nevertheless, an innovative council: we explore commercial opportunities, we investigate alternative ways of delivering services and we are focusing on how we can ensure efficient and effective services in what we do and how we do it. But, to put it simply, we do not have enough money. We need 100% business rates retention. I know there is a point that the Bill that was going to give 100% business rates retention actually did not pass through Parliament because of the election last year, so in theory there is 99.9%, I believe, that could be allocated.
In detail, we are building projections based on an agreed four-year funding plan with DCLG and taking a very pessimistic view of income beyond that. This means that we could be planning more cuts in services than would otherwise be necessary, to the detriment of services to our residents as well.
Guy Ware: In London, for the last couple of years we have surveyed the boroughs’ medium-term financial strategies, which allows us to put together an aggregate picture of the challenges they are facing and the plans they are making. I will mention a couple of things to directly respond to the question. One is that I would echo the point that there is complete uncertainty, not just because of the way the business rates system works, but, as the Committee heard from the previous panel, because that will also coincide with a new spending review, a new formula for distributing resources in local government and potentially a new way of funding adult social care. Add that all up and you have no idea, frankly, what will be happening in 2020.
That is reflected in the survey we have done, in that in the last year—this was published last summer—10 London boroughs did not roll their plans forward into ’20-21, I suspect because they simply felt they had not got enough information to base it on. That was a significant change from the previous year. Echoing the point just made, those plans are focusing on the £1.6 billion of savings that London collectively will have to deliver between now and 2020.
Councillor Fuller: In our authority, as with many district councils, we have seen the greatest reduction in funding of any tier of local government. That is partly because the new homes bonus was top-sliced last year, ostensibly to provide resources for adult social care. That has had a more immediate impact on us. It much outweighs what might have happened in the future for 100% business rates retention. There is also a tension between the retention of 100% business rates, which is an aspiration—it looks like it will be 75%, so that is the absolute amount of cake. But what about future increases? If you can earn and be incentivised, you then keep 100% of the growth, so there are two figures there.
Of more immediate concern also for next year is the concept of negative RSG. Three quarters of the district councils in this country will actually be paying money into central Government from the council tax they raise. That is quite interesting, because up until now central Government have had levers—“If you do this, we’ll pay you that.” You are now getting the concept that district councils, in particular, but also some upper-tier authorities, are paying money into Government. Where is the leverage? Does that change the relationship between central Government and local government? To answer your question directly, we haven’t been able to make any direct plans yet, because there are so many other turbulent factors in the meantime that are more urgent.
Janice Gotts: Our local authority is part of Greater Manchester, which has been part of the 100% rates retention pilot from the start of this year—we very much welcome it, I hasten to add, because it is a fantastic opportunity. In terms of planning, we don’t take that for granted. Any form of effective financial planning for 2020-21 is exceptionally difficult. It is a different spending review period, and we have got no certainty on quantum and on allocation methodology. There are so many changes coming through. I sat through the previous session and this one, and the word “uncertainty” has cropped up so many times. That is certainly where we are at the moment.
One of our biggest concerns is that we don’t even know how to plan for 2019-20 at the moment. We have had no confirmation from the Ministry of Housing, Communities and Local Government about whether 100% retention will still apply to those that were part of the pilots in 2017-18 and the ones that went in in 2018-19. We are obviously asking for confirmation about what is going to happen in 2019-20 to help our effective financial planning.
Despite all that, we are starting to plan for a range of scenarios, as was mentioned earlier. I know that the county councils were arguing about the impact of demand-led pressures. Certainly, as a metropolitan authority, we feel those demand-led pressures. Our biggest risk is social care—adult and children’s services—in terms of both demand and cost. We are further ahead and are making closer links between the health service and social care, and yet those risks and concerns still remain. We are still at the very early stages of that. We recognise that it is one of the key things that need to be done. It is perhaps the only show in town, in terms of trying to bring those things together not only to get cost down but so that the patient, the person or the resident has a better experience, in terms of need.
There isn’t an easy solution. We recognise that they can work better, but we can’t ignore the scale of the demand, which is forever rising. We try to plan based on a bigger regional perspective, as well as that of Greater Manchester. We plan not just as a city on its own, but obviously we are a city region so we recognise the role that Manchester has to play in that.
Councillor Fuller: I would characterise the 100% as a bit of a mirage. Although it is tantalising, we don’t know what the needs will be in the meantime. We talk about 100% for local government in aggregate, but in the Budget in November the Chancellor gave a preferential rate to mayors and combined authorities, which have not typically been part of the local government ambit. There is a lot of turbulence there, and it is very difficult to plan in that environment.
Q38 Liz Twist: You have all talked about the uncertainty. Has it stopped you making decisions you would otherwise have made, either about developing or changing services?
Councillor Finch: The financial uncertainty is going to lead us to be more cautious in moving forward. Indeed, in terms of investment programmes and plans, we have a gap that will be £94 million by 2020-21. Clearly, we have to produce a balanced budget for that period. Therefore, it would be imprudent for us to set forth on an ambitious programme for highways infrastructure or for any other major programme. We have to be very cautious because of the uncertainty that surrounds the potential that business rates will be devolved to us.
Q39 Liz Twist: Has that caution led you to do things that you might have thought would be better done another way if you had that certainty in the future?
Councillor Finch: Certainly, we have a history of being an innovative council, in terms of looking at new ways of working and how to re-engineer our services. We have continued to do all of that work. Nevertheless, we are looking forward to a situation where the business rates, in terms of whether we are going to get them and what other additional duties are going to be put on us, naturally make us cautious about whether the 100% will actually yield to us free funds that we can use in a number of situations.
My colleague John Fuller mentioned some of the other pressures that were there. I could mention, for example, the Valuation Office Agency. We know that, since 2010, over a quarter of a million valuations are still unresolved. That in itself potentially has a massive impact on us as local authorities, because it can be a negative. It would be nice if it was a positive, but usually that would be a negative impact on us as well. We are faced with an increase in the national living wage. I understand the social reasons for that, but it puts an additional pressure, by ’20-21, of £90 million on our costs as well. So there are many pressures coming to bear that require us to be prudent and careful, but nevertheless to still look for innovative ways of delivering services, and we have done that.
Councillor Fuller: While the detail is somewhat opaque, the Government are giving market signals, and the market signals are that you are going to have to earn your way. The very fact that rate support grant is going to go down to zero is no alternative. If you want more money in the future—we don’t know what the quantum will be, but if you want some more money, you are going to have to earn it yourselves. So as a response, we have developed a housing company—our own, council-owned housing company—and we have gone into the business of building houses again. That is not just a good thing for social purposes—choice in the market—it is undoubtedly there to raise revenue. We have been much more proactive in terms of developing land, and we are building our own commercial space as well as enabling more new homes bonus and building more homes.
The article of faith is that if you get the economy going and are quite proactive in managing the market and focused on delivery on your own account as a council, and fingers crossed the Government will allow you, post ’20-21, to keep a greater uplift, so we have a forward trajectory of earning cash. Of course, that is on the earning side. On fair funding, which is the spending side, well, it’s in the lap of the gods.
Q40 Liz Twist: Mr Ware, you mentioned that a number of councils had not felt able to roll their plans forward. Can you explain what you meant by that?
Guy Ware: When we surveyed medium-term plans 18 months ago, everybody had a four-year plan. This time around, a number of authorities have a three-year plan. We didn’t cross-question them, but I think they took the view that they had so little data to go on that rolling forward for the year into ’20-21 was not going to add anything to their ability to plan for the future.
Within that, I would make the point that London boroughs and authorities across the country have now spent seven or eight years planning to take multiple tens of millions out of their budgets each year, and that has become ingrained behaviour, for good or ill. Local government has proved itself very, very capable of making savings. What impact does that uncertainty have? Well, it is not helpful, but when I was a finance director, what I would have been advising my politicians to do would have been to say, “Well, let’s just assume we are going to have to save another £20 or £30 million in ’20-21 and crack on and do it.” There comes a point where that is no longer sustainable. You wound up with the first part of the panel talking about Northamptonshire, where things are clearly not sustainable, and the question will become whether, if things don’t change, that challenge will become more widespread.
Q41 Liz Twist: You have all described people in those circumstances being quite prudent and making decisions or seeking to bring in other income. Does the fact that you are having to plan while not knowing what is ahead challenge the quality of the decision making about what would be in the best interests of services going forward?
Guy Ware: Well, you can look at what has happened over the last couple of years, when we have got close to the edge in a number of service areas, and not just in local government but across the public services. In local government, in relation to social care, Government took a view that we were clearly getting a little bit close to the edge and pumped some money back in in the last couple of years. We could argue about whether that is adequate recompense for all the money that has been cut out over the previous six or seven years, but the point is that it is not a very sensible way to plan.
You will have had authorities across the country making very difficult decisions about withdrawing care or rationing care that suddenly, at very short notice, found that they had the ability to raise more council tax—a new grant. I am sure they managed that well, but it is not a sensible way to plan long-term change in services. If you are having to reduce the cost base significantly—63% will have been taken out of local government core funding from Government by the end of this decade—the only way you can respond to that level of change is through long-term planning. A system that involves endless cuts and occasional lobs of additional cash is not a way to plan anything seriously long term.
Janice Gotts: To add to that, we have all seen a lot of short-term measures to address long-term sustainability issues. Even though we are looking for ways to transform services, as with health and social care or even within social care, they do not happen overnight. You need the transformation funding to see the change happen and to have the length of time you need to see it turn over and make a new model of care and a new way for people to engage with the service in a more joined-up way. In the sector, we need time to allow us to do that.
In GM, because we have 100% rates retention and the health and social care transformation funding, we have been lucky in that we can use some of that, but the need is so great that it is quite a significant ask. We have been able to look at things such as putting things into productivity funding so we can try to grow the economy better in GM to address some of the gap between the taxes we raise and, to be frank, how much it costs in relation to the needs and so on that are up there. Within Greater Manchester, we are talking about a £7 billion fiscal gap between the taxes raised and the public spending that we have. We really need to think about how we can invest that to turn things around, but as I say, it does not happen quickly. It probably happens more quickly locally than it does centrally, but unfortunately it still does not happen very quickly. We need time to make these things work.
Councillor Finch: If I may come back on that point, it is important to recognise that with the initial offering of 75% of business rates versus 100%—this came up in the earlier panel’s comments as well—there is still not detail and clarity around the withdrawal of grants in terms of Public Health England and that cost being subsumed into business rates, or around Transport for London potentially, for which the charges made in terms of their capital funding are absorbed by the Government, or indeed around the rural services grant, for example. What we do not know, and what we do not have, is clarity around what the programme will be. What will be included in that additional 25%? What will be available to us and for us to invest in our services?
Councillor Fuller: Here we are in the Thatcher Room. As a shopkeeper, Margaret Thatcher was very focused on income and expenditure, which gets to the heart of it. Let’s not beat around the bush. Our ability to increase our revenues is related to the growth in the economy, whether that is business or housing growth—to how big the national economy grows and what our capacity is to draw a commission from that. On the negative side, the demands are driven by demographic changes, by medical changes and by societal changes, and those costs are growing at a much greater rate than the growth in the economy—our ability to raise income.
A number of authorities may be mentioned in this session—Northamptonshire has been raised—but one thing is for sure: whichever authority you choose, there will be a period between now and five or 10 years when the divergence between your income and your cost is such that the wheels will fall off. I would characterise that as a transfer of risk—a transfer of demographic and cost risk—from central Government to local government. We have to ask ourselves whether central Government are best placed to assume those wider risks in the national economy, over and above the ability of the growth of the economy. That is why we have a state, to take some of those big areas. Unlike the health service, local authorities have to balance their books year after year. One questions whether fundamentally, local authorities are best placed to assume those really big risks. That is the problem we are in.
Q42 Liz Twist: But we have heard quite a bit about local government wanting to assume greater responsibility and autonomy, yet you are suggesting the state has an important part to play in bearing some of the risk. Is that right?
Councillor Fuller: There are certain cost pressures that grow in relation to the economy, for example skills, infrastructure delivery or, dare I say it, broadband. There are certain things that it is absolutely credible that it will be possible for local authorities to do, if more functions are passed to local government as a result of having a greater share of business rates. What is not realistic in the very long term is to have some of those demand pressures such as social care and children’s services, which we know will grow like Topsy, landed on local authorities—unless, of course, central Government are prepared to compensate for those demographic pressures.
Guy Ware: Either to compensate or, as was touched on at the end of the last panel of witnesses, to shift some of the powers to raise the resources to do it. There is a key issue of scale, both geographic scale and scale of budget, in the extent to which you can balance the risk of cost pressures against your ability to raise resources. As Rob Whiteman said earlier, it would need a broader tax base in terms of a basket of taxes and a range of ways in which local authorities can raise money, some of which would be transferred from central Government at the moment, either by devolving the tax themselves or by sharing a percentage of the take of those taxes. If you gave local government a broader ability to raise money, it would be better placed to manage some of the risks of those demand growths. What one should not do is to pass the risk without passing on the ability to raise the resources to manage that risk.
Q43 Liz Twist: To go back to some of the detail, what transitional arrangements do councils want to see for the introduction of the 75% retention?
Councillor Finch: I think there may be a requirement to have transitional funding put in place, for example. There is a need to ensure that councils are allowed sufficient time and funding to make the appropriate decisions to manage within their resources, as an example. There is an absence of the detail we need, which would enable us to ensure the transitional arrangements could be put in place. Another example, as I mentioned earlier, is things such as the backlog of Valuation Office cases to be resolved.
I am sure we will touch on fair funding. We referred to the four-block model in the past—I think the previous treasurer from Surrey mentioned it—but the data on that has not been updated since 2013. We are dealing with data that is out of date and with delays in valuations, all of which have an impact on what funding local government authorities might receive. In terms of transitional arrangements, we need to get our house in order. If we are going to use something equivalent to the four-block model and accept that there are delays in the valuation of properties, which go back eight years now, we need to sort those problems out.
Guy Ware: If by “transition” you mean between now and 2020 when the new system comes in, as opposed to what we do at the point it comes in, the key issue will be answering as far as possible a number of the uncertainties we touched on earlier. Appeals is definitely a key one, but also things such as the revaluation period for business rates. The Government have said they want to move towards a three-year revaluation cycle, which would encourage and support them; the more frequently you can revalue, the better, in my opinion. The question is how that relates to the reset cycle, or how it will relate to the reset cycle in future.
There is also the key issue that, as we mentioned, a number of things are going to happen in late 2019: the fair funding review, the design of the 75% system, possibly the debate on adult social care and the new spending review. What that means is that we are likely not to see any real numbers for individual local authorities until December 2019 for budgets that start in April 2020. In a way, an advantage of the slippage of a year is that you can bring all those things together and, hopefully, have a sensible co-ordinated approach, but it creates a very big cliff edge. So at the point of transition—to answer a slightly different question—I think there is going to have to be some fairly major transitional funding in order to smooth the impact, because otherwise a lot of authorities will be seeing very, very huge changes. That might be right in the long term, but it needs to be managed and we need some transitional funding that then unwinds over a defined period, rather than the sort of damping that we had last time around, which has never unwound.
Councillor Fuller: The question was: how do you want to do the transition on the retention? I don’t think we know. The transition on the retention is one element. You have the transition on the fair funding, which is another element, and it is really the net-off where we will need—on Guy’s point—to have the transition. It is far too premature to say, because that is just the income and the expenditure. It is back to that point again: what is the balance? The last thing we need is another Royal Commission. My goodness, we have had a lot of those. The Darra Singh one was the most recent one, about 18 months ago. But we do not actually need those. What I would say is that we have some business rates pilots in play, so let us get some urgent, and if necessary interim, results for some of the behavioural changes that they have exhibited, and feed those in. It is too late for any more naval gazing and reports. It is next year; we need to get going. The time for all that sort of stuff is over; we have to roll up our sleeves and get on with it.
Chair: We will move on to 100% business rates retention.
Q44 Helen Hayes: Janice Gotts, what has been the impact of taking part in the 100% business rates retention pilot?
Janice Gotts: We have benefited from the fact that as Greater Manchester we have enjoyed growth. We have been able to retain within Greater Manchester. Although we have baseline assessment funding that is doing that, thankfully growth in business rates has become higher than that. While previously we would have paid 50% over to the Government—obviously 100% retention—we are now keeping that back within GM. Although that does not allow for longer-term financial planning, what it does do is allow us to fund certain investments that we would like to see within GM: I mentioned earlier the productivity fund and being able to help with economic benefits that we can see within Greater Manchester.
That is economic benefits not just as an end in itself; it is economic benefits that think about the wealth of society in general and what we can bring back to Greater Manchester. To be frank, it helps nationally as well, if you can generate growth within a local economy. That has been absolutely crucial for us and we benefit from being able to think more about how we can be more self-sustaining, about where we can have more local discretion around where we can help to put this funding and be more thoughtful about how we use it in a local area—a local GM area—to help to sustain some of the improvements that we want to see. For instance, within Greater Manchester we have issues with things such as homelessness and other need-based areas. It is about how we can invest in some areas that we think can help to sustain this or improve this going forward. We can do that because we have some capacity within 100% business rates retention but we make that decision on a GM basis.
Q45 Helen Hayes: What would you say are other kinds of key lessons that should be drawn from the pilot and applied elsewhere?
Janice Gotts: One of the key underwriting principles we had was no detriment. We did not want to be any worse off than we were under the 50% system. If you are piloting these things and trying to work with them for the first time, you obviously need some assurance that you are going to be no worse off. That principle was fundamental for us. It is an incredibly complex system. I cannot emphasise enough how complicated business rates are. That is from someone who does numbers. They are really, really complicated.
The biggest concern for us is the volatility of the system—the volatility of appeals. The Government figures assume that about 4.7% are likely to be appealed generally. In Manchester, we are working on a figure of 10%, based on our 2010 list, in 2017. We are raising business rates of £370 million in Manchester, so we have to set aside £37 million for the risk of appeals. It is not an insignificant figure. Certain things, such as the NHS announcing that it wants to look at certain charitable reliefs, could completely wipe out a significant part of the funding that you get. While there is a safety net in place—it is slightly higher—at 100% you still have to fall a significant amount before you hit the safety net, and it obviously has to be funded from the sector in general.
The volatility in the system is enormous. That is probably what John was referring to earlier when he mentioned needing the state, in a way, to look at the risks within the system. Can we, for instance, look more flexibly at how we use the central list—we know there are funds held there—and try to think about using that more as a safety net to support local government through this?
There are things about behaviour as well. On the information flows that we need and the support we get on that from the Valuation Office, we have moved to “check, challenge, appeal”, but I think it is fair to say that there are teething difficulties with that process. We are therefore concerned that we are going to see a number of demands coming from that. Also, obviously, we are still prone to Government policy about, say, what small business rates relief is introduced, how it is extended and what that means for section 31 grants. You are far more beholden to a grant regime than you thought you should be under 100% rates retention.
To me, this is as much about the volatility and uncertainty of the system by which you generate it. If you were more certain about what you were getting in, to come back to the first point about the longer-term investment and how you sustain things, you could actually put money in and know that it would be there for a while, and you could build on that and see benefits coming back.
Q46 Helen Hayes: Guy Ware, what are the potential benefits for London of taking part in the 100% retention pilot?
Guy Ware: The main pilot for London as a whole—there is a separate issue for the GLA and TfL in the current year—will come into effect in April. The first thing I should say is that 100% retention in London does not mean that 100% of London’s business rates will be retained in London. We will have an aggregate tariff for all the authorities added together, so we will continue to pay over. More than £2 billion a year will flow out of London’s business rates to support services in the rest of the country. We will keep roughly two thirds, in practice.
There are three areas of benefit, really. First, there is a straight cash gain for us. As Janice said, we will be keeping more of the growth that is happening in London for a year. We have no certainty beyond 2018-19 as to whether the pilot will continue, but for at least 12 months we will benefit from retaining more of the growth and not paying a levy.
On the second benefit, we are at one with the Government, in a sense. One of the things that they were seeking and we were seeking out of this was a joint governance arrangement between all the leaders of London boroughs and the Mayor of London for decision making. We have set aside a chunk of the additional net benefit that we will be retaining for a strategic investment pot, which will be used to invest in future economic growth. That has a decision-making arrangement around it, which requires a high level of consensual support from across the whole of London in order to deliver those decisions.
I was told when I started it that the idea that 33 London boroughs and the Mayor would sign up to a single pool in the first place was completely impossible, but they did. So, in a sense, quite beyond the specifics of the system there has been quite a helpful push involved in it, in building the ability to make decisions about some things that are quite tough. You know, when you get to distributing money, that’s about as down to the knuckle as politics gets.
I think there is some learning to be done. We have been asked, “What are we actually piloting?” And to an extent, given the gap between what London asked for when 100% retention was first floated a couple of years ago—we pitched a very ambitious, genuine devolution model to Government—that is not what is happening. There is a very, very limited form of change.
However, as Janice says, this system turns out to be far more complicated than even I knew, and I’d been a finance director for many years in different places, and I’ve learned an awful lot about it in the last year that I wish I’d never had to learn.
It is unbelievably complicated and part of the reason for that is the fact that Government keeps tinkering with it. So, those section 31 grants are a mismatch of things, where they are having to compensate local authorities for the fact that the Treasury centrally has taken decisions to change the basis of business rates. So it keeps changing small business rate relief thresholds. Last year, it decided that the indexation of business rates would be changed two years earlier than it had previously announced it was going to. And so on.
We have special arrangements for pubs. I’m sure there are good reasons for all these things, but they add up to a deal of complication that comes from a single Treasury trying to manage what will hopefully become a local tax. Up to now, it is not a local tax, but if it is going to be a local tax then Treasury needs to stop trying to intervene at the micro level and reset elements of it, because that makes our life very difficult.
So, some of the learning that I think the sector will get from the pilots—London and a dozen others—is the ability we could have to simplify some of this, if we were given the power to do so.
Councillor Fuller: Look, it’s really difficult. I mean, some of these difficulties are self-evident; sometimes, the difficulties argue themselves. But let’s not lose sight of the big opportunity here, and that big opportunity is to have those councils that are best placed to grow their local economies—the council exists to grow the national economy one local economy at a time. And those councils need to be incentivised to do that.
On the earnings side of the ledger, which is business rates, if they’re going to take some big bets, such as, possibly, a new link road or to put some other piece of infrastructure in, they’re just going to need to have some of that income—as a result, their incremental income—retained for probably 20 years.
If you were in business, you would take a 20-year mortgage and I think that, regardless of what goes on under resets, and Guy has spoken about those in brief, a proportion of that income needs to be sustained for 20 years at least, even though it may be a diminishing proportion, at least to give those long-term incentives for the council to manage the local economy, to grow the national economy one local economy at a time, and it’s the organisation that is best placed to do that. And this behavioural shift that enables councils to do that is possibly one of the biggest wins we can get out of the whole change we’re talking about.
Janice Gotts: Can I just add to that, as well? This investment is needed for that length of time, because basically you have to state minimum revenue provision in order to fund that investment over a longer term. So you do have to make a real fiscal long-term assumption and commitment to that.
Councillor Fuller: You need at least a 20-year horizon.
Q47 Helen Hayes: May I ask David Finch what the consequences are for Essex of not being included in the 100% retention pilot?
Councillor Finch: Thank you for the question. I’m sitting here musing to myself that we had 15 MPs who signed up to, if you like, our offer to be part of the pilot scheme. That would have meant that, had we been successful, Essex County Council would have received another £8 million, and wider Essex—the districts—would have received £30 million, for example. To translate that into taking care of the infrastructure and the elderly, had we had that, it would have meant that we could have purchased over 550,000 domiciliary care hours, or filled 16,000 potholes, if we had 16,000 potholes—but we haven’t.
Q48 Helen Hayes: In the context of the longer implementation period for further business rates retention, what are the priorities that need to be ironed out? We have talked about some of them, so there is no need to go over that ground again, but what are the priorities for designing a system that really works for local authorities?
Councillor Fuller: Sorting out appeals, which is very turbulent; making sure there is stability. Putting in and taking out power stations, for example, is a big-ticket item. Sorting out the central list and the interplay among the central list; it could act as a bit of a co-responsibility pot, in case a big employer in one small area fell away, because we don’t want that local area falling away. There needs to be some sort of central mechanism to split it. It is all part of the design, but again, it is about positive incentives to grow the economy for those councils and areas that want either individually or collectively with neighbours to take some big bets. It is to reward them for that, because if they don’t take those bets, who is there to do it?
Guy Ware: This is a point of detail, although a related one, on how the incentives will work in the future. Clearly, the incentive will be smaller by at least 25% than we have anticipated under 100% retention, so the question will be whether the incentive remains. A particular element of that is whether there will still be a financial benefit to pooling in the existing system. Apart from pilots, the reason local authorities pool is that it saves levy payments and they hand over less of the growth.
Now Government has indicated that it does not intend to have a levy in the new system. If the consequence of that is that there is no incentive to pool, we may lose some of the advantages of scale that can drive larger-scale investment and also help manage risk. So there is a debate to be had about whether the desire to encourage pools in future still exists.
Janice Gotts: Obviously, we, presumably along with some others, will be pushing for the continuation of 100% rather than 75% within our areas, in line with the first panel who sat here. Our aim is for the gap not to be filled with the transfer of further services down the line into local government, and for the pressures within local government to be recognised, and the need for local government to invest in those areas going forward.
Guy Ware: What they will do with the other 25% becomes the key question here.
Councillor Finch: I know that there is considerable work under way through the groups containing representatives from local government, the Local Government Association and the Department for Communities and Local Government on the detail, for example, of the approach to redesigning the system. It is a very complex process and a very complex problem.
As I mentioned before, we need to tackle the inadequacies in data used to make judgments on how funds are allocated, and we need to deal—I have said it three times now—with the backlog with the Valuation Office. More than 250,000 properties are still outstanding for eight years. That is a significant issue in terms of what impact it may have on local government funding.
The basis for redesign of the system needs to be having accurate data in place before you make any changes to the system, quite frankly. Nevertheless, the system implementation needs to be sooner rather than later, because of what amounts to the dire situation in which local government will find itself financially as we go beyond 2020-21.
Chair: Mike, do you want to follow up on this?
Q49 Mike Amesbury: What are your priorities for the fair funding review?
Guy Ware: Perhaps I will kick off. There was a lot of talk about transparency and simplicity during the first panel. Those are ambitions that we would share, but recognising—Councillor Simmonds touched on the point delicately—there is a trade-off between simplicity and fairness, if by fairness we mean a recognition of the need to spend in a given area, balanced with the resources that that area can possibly raise. As soon as you have got to that point there is quite a lot of complexity there already. I do not think there is anybody who would not suggest that we need a formula of some sort, because things do not cost the same in all parts of the country. Deprivation in particular and a number of other factors have a significant impact on the demands and pressures on local authorities. There has to be some balance, so the key question is whether we can reduce the complexity rather than try to eliminate it, and how robust are the measures that we are going to use to drive the formula?
From a London perspective, we would be particularly concerned about how deprivation is measured in future and how the measurement is kept up to date. The point has been made a number of times that the data driving the current system is massively out of date. London’s population is growing incredibly quickly and that has a significant impact on the distribution of resources. It is not an easy thing to measure. One of the advantages of having to delay it for a year is that we have a real opportunity to have a significant review, and academic as well as political debate about the best way to represent and reflect how deprivation drives costs. Again, from a London perspective, if you look at incomes, not surprisingly, London has a relatively high salary and wages base. If you look at incomes after housing costs, they are below average in London. Things like that need to be reflected.
The 2019 deadline was always ambitious. We were always sceptical as to whether that would ever happen, and we are not altogether surprised that it has not. The key priority for the next period in principle is to make sure that that extra year is well used to tackle some of these real issues and make sure that we do it properly.
Councillor Fuller: In the first part of this session, there was a fair bit of unanimity that councils want to have a greater proportion of the income. Raising the money is less contentious. Spending it—the fair funding—is pregnant with all sorts of contentions and difficulties. We are trying to have a formula that tries to satisfy different political groups, different tiers of government, different geographies and different areas. It will be really complicated and we are not starting with a blank sheet of paper. One has to really question whether a single formula ever could work out the multiplicity of London versus the rest of the country, counties versus districts versus unitaries, plus or minus fire authorities, and if there is a strategic transport authority, how does that one work? Personally, I think it will be really difficult, and that is all within the context of political deliverability as well. With an apparently constant sum of money on the table, which you have to cut in different ways, there will be winners and losers. The winners will keep quiet and the losers will probably squeal very loudly.
We spoke earlier about the four-block model with the floors and so on. At the moment where we are coming from is broken. That was Paul Carter’s earlier point in the previous session. It is opaque. Eric Pickles once said only three people understood it and two of those were locked in the basement. It is probably worth having a system whereby there is a certain amount of cash per person in an area. There will have to be almost a semi-mechanical way, another element, where you get so much per person, per road, per schoolchild and so forth. There will probably have to be an element where some historical allocations are taken into account. You will not level up the playing field overnight. There will be some transition and, to the earlier point, some sort of measure of the earning capacity of an area.
So I can see we are going to replace one four-block model possibly with another, but if they are well described in the way they are not at the moment, and if the connections between those new blocks that I have postulated are well known and understood, that will be a significant advance on where we are, and it is something worth fighting for. It is not an impossible task, but it will not be easy. We have got a lot to cover in just a few months. At the same time, there is the earnings side and the spending side and getting it all done by December to sort it out by April next year. That will be very difficult. The transitions are going to be where the problems lie in how we do that.
Janice Gotts: We obviously would share the concerns about needing to relate the funding to what is driving the cost. We think that areas such as deprivation and the index of multiple deprivation provide a great focus to be able to do that, but it needs to be up-to-date information that is used, not something that was done many moons ago, because we all know that things have moved on since then. For a lot of us, things within our areas are moving on quite rapidly each and every year—probably to a much greater extent than ever before.
What we are concerned about is the timing. While doing it next year is welcome, by the time all of this completes—we mentioned this earlier—you have got to then start thinking about setting a budget. In local authorities, budget setting starts several months before we get to April. There are also the approval routes that it is necessary to go through as part of the democratic process. For the approval of a budget, you are going back several months where you need to have something in place. Whether we are going to see the exemplifications of some of this work to enable a meaningful discussion to take place is something that causes concern.
When we look at the fair funding review—we know that “fair” means different things to different people—we need to think, as I said earlier, about the resource-raising capacity of authorities. In Manchester, 76% of our properties are in bands A and B. When we talk about funding coming from council tax, it is a very limited resource in areas such as Manchester, yet we see high levels of need. We are very keen to see that the review recognises the ability to raise resource.
As mentioned earlier, any formula that you want to put in place is going to be difficult to implement if ultimately the quantum is not big enough. You mentioned the size of the cake. You can split it any way you like, but if we are all going to go hungry, it is not going to help us very much. We certainly need to understand about the quantum that is available for local government. The formula needs to think about a whole-system approach to how we do that, including the funding that we may get from other areas. We are very keen to understand what is going to come out of the Green Paper for social care, because we need to understand how that is being thought of in terms of a funding route. We are obviously very influenced by some of the changes that are still going through with universal credit. We do not think we have seen those unwind enough yet to fully appreciate the impact that will have on our resident population.
Going back to social care, we have the improved better care fund. We have seen a lot of short-term fixes coming through. We need something that is more akin to long-term stability, but again it is about longer-term stability within a quantum that meets the pressure we are all now feeling within local government.
Councillor Finch: I think there are three priorities in terms of the fair funding review. The first is to establish the criteria we are going to be using, whether it is deprivation—obviously it would include that—homelessness, the number of older people over the age of 85, or the resources within the area. We have to establish those criteria. Secondly, we have to establish the data integrity we are using to underpin whatever the formula happens to be. The third point is to make sure that the pot is equal to the task at hand, because if the pot is the same size as it is now, then all you will be doing is just moving elements around, and there will be dissatisfaction with the way the formula works, so I think the funds do have to match the size of the fair funding review.
Guy Ware: To add a point on transparency—a point in principle—we have talked about transparency a lot in terms of simplification, making it easier to understand. There is also an aspect of transparency that is about accountability: where decisions are made, can you actually see their effect?
Within the four-block model, which has been talked about a lot, decisions by Ministers on the weighting of the amounts of money going into each of those four blocks have probably had more of an impact on what comes out at the bottom than all the arguments that local government has tended to have about the precise things we are measuring within it. That is not necessarily wrong, but it is opaque to the world at large. Any system needs to at least have the ambition of making it clearer, where decisions and political judgments are being made, whether local or national, that those are visible to the world, and that people can be accountable for the decisions being taken.
Councillor Fuller: I would endorse that. It has to be made simpler—it can’t be any more complicated—but simpler does not mean simplistic. If it is too simplistic and too broad brush, meeting some of the particular needs of certain communities, such as coastal or rural communities versus some of the communities in urban environments, will be very difficult.
I will make one other point while I have the microphone. We spoke in the earlier part of the session about incentives to grow the economy and incentives to earn. It is critical that there are no perverse incentives to do the wrong thing. The indices of multiple deprivation sometimes lead you down that path. We have the sixth-worst most deprived ward—this is not to deny that some areas are more needy than others—but we cannot champion the fact that we are the most needy, and have it so that “the worse we say it is, the more money we get”, because how will we make the world better? There is a balance there.
That is not to deny that there are more needs, because I can see where Janice is going, but there have to be positive incentives for local authorities to not keep banging on about how bad it is, and to put their shoulder to the wheel. That should not mean that they get less money on a certain day, but the amount of money has to be attenuated in between resets.
Janice Gotts: I don’t disagree with that. I certainly do not want a race to the bottom or anything like that—absolutely not. I certainly think that, at the end of the day, we are also in political systems that are answerable to the electorate in relation to that. They want to see things improve in their lives, and to see promises being fulfilled on what we said we would do for our residents to improve their health, wellbeing and economic state. Politicians and local authorities make those statements, and at the end of the day they are answerable, through the ballot box, for the things they say.
It is not a case of perverse incentives—we certainly should not be thinking about that—but we need to recognise that funding is required in order to improve those things. The more things improve, quite rightly, the less funding should be required going forward.
Councillor Fuller: Let’s be realistic: the troubled families programme, for example, introduced some perverse incentives that are well known; I am sure you have looked at those in more detail. We must learn the lessons from that case. By design, if this is to be a long-term solution to local government funding, we mustn’t fossilise and bake in perverse incentives to do the wrong thing. We have to do the right thing, so that everyone has a better life. We have to solve problems, not manage caseloads.
Q50 Mike Amesbury: Finally—Guy touched on this—is the longer implementation period of the review beneficial at all?
Guy Ware: As I say, it is only another year. The original target of 2019 was heroic. I wouldn’t want to overplay it, but, as I said before, it brings together a number of things around the spending review that will all have to happen by the end of 2019. Indeed, the index of multiple deprivation will be updated by August 2019 as well.
All those things coming together gives us the opportunity, if it is seized, to have a co-ordinated consideration of how they impact on each other, which would be good. However, it creates a bit of a big bang of a change in April 2020, so the challenge will be how to make sure that that does not destabilise the system.
However, we cannot avoid sensible change along the way. If the review gets you to a point of change that ought to be being introduced, the fact that it is significant should not stop you doing it; you just need to manage the transition.
Councillor Fuller: And there might be an opportunity to get some agreement along the way. Let’s take the number of houses in an area. Is it the number of houses? Is it the number of houses normalised to band D council tax? Is it the number of houses normalised to band D council tax that actually pay council tax—the tax base? At the moment, Simon Henig from the city of Durham says that he has 15,000 students who do not pay council tax. Canterbury is another famous example that we are all probably aware of.
There is nothing to stop the Department and the sector agreeing certain definitions up front to minimise the surprises—the rabbit out of the hat—that may come in December this year. I would encourage the Committee to try to identify some things where it is capable of getting common ground, so that the direction of travel is clear.
Janice Gotts: It is good that we got the most up-to-date data, but as we are moving onwards and that data cannot be readily updated year on year, we need to use this time to ensure that we have adequate forecasting models that are being used by the ONS and others, so that we are clear. We have concerns that population trends have been understated for a number of years within ONS data compared with what we are actually seeing on the ground. We need to take this time to think about the systems that underpin a lot of the information that will be built into the formula.
Councillor Finch: To answer the question, I think it depends how well the time is utilised. If the time is used in a progressive and thoughtful way that brings about beneficial results, it is worth the wait. If it does not, only time will tell whether it has been worth the wait.
Chair: On that point, we can probably end proceedings with everyone agreeing. Thank you very much for coming to give evidence to us this afternoon; it has been appreciated.