Written evidence from the Chartered Institute of Public Finance and Accountancy

The issues raised in the NAO report and their recommendations; and the urgent actions now needed by DCLG are critical to help protect the financial stability of local Government before councils reach the point when they become financially unviable and cannot deliver the services to the public that have been mandated by parliament.  

Issues identified in the NAO report have been raised previously with DCLG officials and Ministers and have generally been dismissed or ignored and have resulted in changes of approach or decisions that would reduce risk; achieve value for money; or deliver on their duty to allocation of funds voted by parliament to deliver services. 

I am writing to you as the former City Treasurer of Newcastle City Council and as someone who has first hand evidence of the issues raised by this very good NAO report.  I have personally been involved in the Local Government funding system discussions since 1988 and have been involved in the national Settlement Working Group up to March 2014 discussing these issues with Senior Government Officials and Ministers each year as part of the annual consultation process. 

I have evidence that Ministers and senior officials were made aware of the damaging impact of several key decisions made in recent years that have directly led to the disproportionate distribution of spending cuts.  Having looked ahead over the next few years, I believe that this has significantly increased risk and is accelerating the point in time at which councils will become financially unviable.  This threatens to result in decisions that are poor value for money and put at risk core services that the public relies upon. The risks are unevenly distributed, with the greatest pressure and risk being focused on areas and people across the country in the greatest need.  

In recent years as well as presenting this information to Ministers and officials I have suggested simple and practical changes which could be quickly implemented, significantly reduce risk and improve the fairness and integrity of the funding system. 

Next year, Birmingham (mentioned in the NAO report as being under pressure) will see a spending power cut of -£63m (-£147 per dwelling or -5.7%).   This is around three times the England Average cut of -£45 per dwelling (-2.0%).  This contrasts sharply with increases in spending power of the wealthiest / least deprived areas – e.g. Buckinghamshire, Hampshire, Surrey, and Wokingham of up to +3%.  This incredible outcome is mainly due to a couple of key aspects of the design of the current funding system – specifically the way topslices are made to fund New Homes Bonus and a massive hidden cut in base council tax resource equalisation.  This last item has increased Birmingham’s cut next year by over £20m and by £35m over the last two years.  Making the New Homes Bonus topslice fairer could reduce Birmingham’s cut by nearly £13m!   Simple changes could more than half Birmingham’s cut next year.

These alternative options for change would still achieve the deficit reduction that is needed and deliver the same incentives for growth.  It has been disappointing to see that alternatives have not been explored and nothing has effectively been done to defer or avoid the looming crisis.  Indeed key decisions taken over the last 18 months about the settlement for 2014/15 and 2015/16 that would also impact on future year have served to make matters worse, increasing the risks and accelerating the crisis.    

The lack of action by DCLG to address these issues has also led me to write a number of articles in professional magazines seeking to information the debate about these critical issues.  This is not because I am politically motivated, one way or another – I have challenged decisions that I believe to be unfair and damaging to the integrity of the Local Government Finance system by all Governments over the years.   My main motivation is that I am passionate about protecting Local Government services and a firm believer of the importance of key principles that should underpin the Local Government Finance system, including fairness, transparency, stability and its support for the effective implementation of decisions made by parliament.

The NAO report is very important and covers many but not all of the key issues, (e.g. the need to looking ahead over several years to see the future impact of decisions).  What is important is what follows over the next few months – what action is urgently taken and what changes are made – e.g. to the decisions that will be shorty be presented to Parliament about funding for next year and for future years.

I have watched the presentation of evidence to the Public Accounts committee on local government funding issues in the past, including the New Homes Bonus arrangements.    These are extremely complicated and technical issues to consider and I have been frustrated at times at some of the evidence and assurances that have been given by officials.   There is evidence that many of the protections that are described are ineffective and many of the incentives that have been introduced have been poorly designed and poorly implemented by DCLG. 

This can clearly be seen by looking at the outcome of the cumulative impact of the change in spending power since 2010/11; the proposed settlement for 2015/16 (which will shortly be presented to Parliament); the growing redistributive impact of New Homes Bonus and the lack of additional business rate income available to councils in 2014/5 to help fund core statutory services.

A major risk to the financial sustainability of councils is the inability of DCLG to take appropriate decisions and to act quickly enough to implemented changes that will alleviate the threat.   A prime example of this is the failure of DCLG to review or change the New Homes Bonus arrangements - which is one of the two major causes of the additional pressures facing the councils that are most depended of grant and are under the greatest pressure.  An issue which will no doubt be of great concern to the Public Accounts Committee, given its scrutiny of NHB earlier this year and its recommendation to review the system.

The second major issue is the way that the council tax resource equalization adjustment is being cut by being hidden within the complexity of the new grant system.   This is the major single cause of the disproportionate cuts in spending power and is not one that is easy to understand but could be quickly corrected and would reduce risk significantly.

I hope that by submitting this evidence to you it will help ensure that key questions can be asked and addressed which will lead to real and urgent changes that will reduce the risk to the financial sustainability of councils in the short term.

Paul Woods

24 November 2014

DETAILED EVIDENCE RELATING TO THE FINANCIAL SUSTAINABILITY OF COUNCILS

There are a number of important points and detailed evidence that I would like to draw to the attention of the Public Accounts Committee for your consideration to help inform your scrutiny of this very important issue over the next week or two.

Cumulative Impact of Changes in Spending Power

The first issue is the importance of the cumulative year on year impact of the decisions that are being taken on councils finances and spending power around the country.   I am very pleased that the NAO is recommending the publication of information for each council about the cumulative impact of financing cuts and changes in spending power over the last four years.  I have sought to draw this to the attention of Ministers, MPs and decision makers by the presentation of the Cumulative change in spending power (using the definition of spending power used by DLG) published in heatmap form, which simply and clearly highlights the differential impact of cuts around the country. 

I had seen the publication of annual heatmaps of spending power figures by DCLG, but was concerned that there was a lack of information about the cumulative impact of changes in spending power.   When DCL failed to produce this cumulative analysis of change, officers and members in Newcastle considered it be so important that I was able to produce an annual cumulative analysis of change and illustrated the impact around the county with help from colleagues in Newcastle by using a simple heatmap.  

I know that commentators have found this analysis helpful and I have been keen to ensure that this is presented to Ministers, official and MPs each year, via consultation submissions from ANBEC and Core Cities.  Several versions have been produced to show the impact in terms of change in £/dwelling or the % change in spending power.   To do this we have had to create the data that NAO is now asking DCLG to publish, it is readily available and DCLG should be able to produce it relatively quickly to inform the debate on the 2015/16 Local Government Funding settlement.

Both DCLG and NAO have recognized the importance of looking not just at the changes in grant but at the impact and outcome in changes in the spending power.  The analysis is not as simple as it may appear from the heatmap for two key reasons.  First there are structural changes in the funding of local government between years that need to be taken into account and adjusted for and we have relied on the adjustment made by DCLG.  Secondly, to get a consistent picture across the country it is necessary to combine county, district and fire services together and we have adopted the approach used by DCLG in producing annual heatmaps of apportioning county level spending power to districts based on the population in each district.

The following two heatmaps show the pattern of the cash change in spending power in £/dwelling terms from 2010/11 and the % change in spending power this year and next under the new local government finance system introduced by DCLG.  It is important to note that this is presented in cash terms as opposed to real terms as recommended by NAO.

Change in Spending Power from 2010/11 to 2015/16 in £/Dwelling

The largest cuts in spending power have occurred in parts of London and the North.  There have been cash increases in spending power in parts of the South East. 

Changes in Spending power in 2014/15 and 2015/16 in % terms

This heatmap shows the even more disproportionate impact of the change in spending power resulting from the design of the new local government funding system.  With disproportionate cuts in spending power increasing and accelerating the risk to the financial sustainability of councils in areas shaded dark red.   

The following table picks out some key figures, which demonstrate the significant differences in the distribution of cuts as reflected in the cash change in spending power from 2010/11 to 2015/16.  Given the mention of Birmingham and Barnet in the NAO report their figures are shown below.  The figures for some of the least deprived unitary authority in England, show cuts in spending power of over £900 per dwelling.  The cut in the Birmingham area of -£690 per dwelling is more than twice the national average.  The proportionate change is also higher for Birmingham at -23% compared to a national estimate of -14%.  The real terms cut will be even higher.

Table 1: Estimated Changes in Spending Power (including fire services spending, before adjusting for inflation)

The cut for the Barnet area is below the national average cut.  In contrast some of the wealthiest areas (e.g. Surrey and Wokingham) are estimated to have a cash increase in their spending power over the period.

It is realistic to expect that cuts in funding will have a greater impact on the cuts in spending power for areas that are most dependent on grant funding, because they had a larger spending power to start with to meet what was recognized as a difference in spending needed to deliver statutory services.

However, a major concern is why councils should see such a variation in the percentage change in their spending power in 2014/15 and 2015/16 and why this should continue in future years, given the burden of cuts that these council have already had to face between 2010/11 and 2013/14.  

Largest Cuts in Spending Power are falling on the most Deprived Council

Each year the House of Commons Library produces a report or note on the settlement and its distribution.  The note for 2014/15 (SN/SG/6816) contains a table (4) which shows the impact on the funding measures by deprivation of local authority single tier authorities.  The following extract from the table shows the annual change in Spending Power and the Settlement Funding Assessment (SFA). Cuts in SFA were higher in deprived areas.  More significant is the overall impact on spending power.  The cuts in spending power in the 10% most deprived areas are significantly higher in percentage terms -4.9% in 2014/15 and -5.3% in 2015/16 compared with the cut in the 10% least deprived areas -0.7% in 2014/15 and an increase of +1.5% in 2015/16.   What the report did not show was the cumulative impact on spending power over the two years – which our analysis highlights in the table on the right.

A closer look at the planned change I spending power in 2015/16 for the 10 most deprived areas in England compared with the 10 least deprived areas in England shows the extreme difference in the impact on their spending power.  The England average change is -£45.  Eight of the 10 least deprived areas see increases in their spending power.

Key Questions

Key questions relate to why the most deprived areas should suffer disproportionately higher cuts in spending power in % terms?

How can these councils be expected to meet the higher pressures on them to provide the statutory services that parliament has agreed?

Why DCLG have build in changes to the new funding system which increases the disproportionate distribution of cuts in spending power?

Whether DCLG recognize the risks involved and how they can expect councils to deliver these savings while still delivering statutory services?

If citizens are expected to be “all in it together” in terms of contributing to meeting the impact of austerity, why should a 2% national average cut in spending power next year (2015/16) not be reflected in a 2% cut for all councils? As opposed to larger cuts for the most deprived and increases for the least deprived?

SHORT SIGHTED ANNUAL VIEW – MUST LOOK AHEAD TO AVOID A CRISIS

The shortsighted annual view of change is a major issue of concern.  As well as the need to be aware of cumulative changes that have occurred over time, what is also important is that there is a clear view of the impact of changes in future years. 

In January I showed the following slide of historic changes in spending power for core cities to Ministers and senior officials, which showed a clear difference in changes in spending power over time.

Change in Spending Power £/Dwelling 2011/12 to 2015/16 (adjusted to be comparable with 2015/16)

I also shared the results of my modeling of the impact of this differential pattern of spending power change over future years.  This revealed that spending power did not simple converge to the same level, it would effectively CROSS OVER and become inverted.  This would mean that Councils facing higher spending pressures and needs would have less spending power than councils facing much lower spending pressures.

The Secretary of State and ministers have justified the fairness of grant settlements by simply pointing the absolute differences in spending power (Newcastle v Wokingham was one example given, despite the considerable differences in circumstances and spending pressures facing each council.   Using the above chart Newcastle would have less spending power than Wokingham within 3 or 4 years – during the next parliament.   Clearly the current system is and will result in unfair and unjustifiable funding allocations if the disproportionate cuts continue to be approved by Parliament.   

These simple modeling projections make it clear that the current system will fail to distribute the funding approved by Parliament to enable councils facing the greatest pressures to deliver statutory services.

There appears to be a worrying lack of anticipation and modeling of the future impact of decisions that Parliament is asked to take, which I view as essential if future problems and disasters are to be avoided. When I presented a copy of my projections of the change in spending power over the next few years it appeared to come as a surprise to the Ministers and his officials.  On official indicated that the changes would be in the next parliament, giving the appearance that the focus of attention was only on very short term planning.

Q What modeling has been carried out as to the annual change in spending power over the next 5 years?  What were the key findings of the modeling and what action was been taken to minimize risk?

FAIRER MORE PROPORTIONATE OPTIONS – NEEDED TO CREATE STABILITY

Ministers have presented this disproportionate weighting of cuts towards areas most dependent on funding as an almost inevitable outcome of the need to achieve savings to reduce the deficit and deliver the austerity measures and to incentivize growth.  I have evidence that shows that this level of redistribution and disproportionate cuts in spending power could be avoided while still achieving the spending reductions and incentivizing growth.

The current disproportionate distribution is explained to two main factors – the biggest impact is the hidden cut in council taxbase resource equalization.  I had a detailed paper on this issue, which is so technically complex that few people fully understand it or appreciate the scale the impact of the change made by DCLG for 2014/15 onwards.   DCLG have been asked on several occasion to illustrate the impact of this change and the alternative of freezing the adjustment at its 2013/14 level, but have so far refused to do so!

I estimate that it has added around £16m to the spending power cut for Birmingham in 2014/15 and that it will add another £21m to their cuts in 2015/16.  If this was corrected in 2015/16, the £63m cut for Birmingham could be reduced by as much as £35m.

The second impact is way that DCLG choose to automatically take topslices in funding from councils as a % of their funding, in particular New Hones Bonus.    There are other fairer options for funding topslices but DCLG have chosen not to consult on these.   The simplest relates to New Homes Bonus and this is explained in the section below.

An alternative to correcting the different elements of the very complex funding arrangements to produce a fairer distribution is to adopt a very simple solution.   That is to adjust grant so that all councils get the same % or £/dwelling reduction in their spending power.   If Ministers decide that the spending power cut in 2015/16 is 2% (£45 per dwelling), then why should this reduction not be simply applied to all councils (before their additional income from council tax and business rate growth)?  It would be fairer and should significantly reduce risk of financial collapse of councils.

NEW HOMES BONUS REDISTRIBUTION – A SIMPLE CHANGE CAN PRODUCE A MUCH FAIRER APPROACH

The current New Homes Bonus arrangement provided financial incentives to councils for new house building.   However the way in which the money is cut / topsliced from the grant that councils had previously been given to fund statutory services approved by parliament causes a major redistribution of funds.

Even if all councils are equally successful and had the same % increase in housing, the most deprived councils with high service pressures would be significant net losers of grant and council in less deprived / wealthy areas would see their grant rise.   This outcome is clearly shown in the table below, which uses Illustrative figures from DCLG.  While Birmingham receives a Bonus of £19.9m, it has a higher grant topslice of -£29.7m giving it a net loss of £9.8m in 2015/16.  Most deprived councils receive a grant topslice equivalent to between -£60 and -£80 a dwelling, compared with an England average of -£39.   The wealthiest councils have a much lower grant topslice. 

This leads to perverse results – Manchester performs well above average and receives a Bonus of £56 per dwelling, but because it gets a high topslice of -£66.50 a dwelling it suffers a net grant loss of -£2.3m.  Richmond has below average growth and only receives a Bonus of £34 a dwelling, it has a low topslice and receives a net increase.  

A simpler, more transparent and fairer alternative approach was suggested in January 2013, based of a similar topslice per dwelling, and the results are shown below.

This grant redistribution can be avoided and in January 2013 I suggested an alternative approach of basing the topslice of a standard amount per dwelling at a baseline point on time.  Using 2010 number of dwelling as a baseline the grant reduction would be -£40 per dwelling at that time.

As can be seen from the previous table the outcome is much fairer distribution – with net gains if you grow housing close to or above the average.  The benefit to Birmingham would be to reduce their grant cut in 2015/16 by £12.8m, turning a net loss of £9.8m into a surplus of £3.0m.  

MITIGATING THE IMPACT OF FUNDING REDUCTIONS

Section 2.6 in the NAO report sets out how DCLG say they have sought to mitigate the impact of funding reductions. 

I consider some of the statements to be partial and misleading.  Several of the measures taken appear to be ineffective at protecting grant dependent authorities and other more critical decisions that are not mentioned have caused additional unnecessary pressures to be placed on all authorities and grant dependent authorities in particular.

Question /Issues that the Committee may wish to examine further include –

1. The upper limit of cuts in spending power was based on a % rather than on a cut in £m or £dwelling terms – giving protection mainly to shire district councils – where their cut/dwelling at an area level was less that other more grant dependent councils that did not receive protection.   Q – How much protection did Birmingham or other councils suffering the highest cut in spending power per dwelling receive?

2. In 2014/15 when the protection was lowered to 6.9% the level of protection only amounted to £9.3m spread between 9 councils.

The protection arrangements result in three council being protected with an increase of less than 5.4%, while other councils which received no protection had a higher spending power cut – e.g. Knowsley? 

3. Given the growth in spending power that is now being seen, did DCLG consider much greater levels of protection e.g. setting a cap at the spending power increase of 0% and recycling grant to give greater levels of protection?

4. Given the much higher percentage cuts in spending power for the most grant dependent areas, is the current protection adequate? Does the 2014/15 and the provisional 2015/16 grant settlements fail the fairness test set out in the 2010 Spending Review guidance - to “limit as far as possible the impact of reductions in spending on the most vulnerable in society, and on those regions heavily dependent on the public sector”?

5. Are the disproportionate cuts in spending power for the most grant dependent authorities ‘fair’?  On what basis is it considered fair?

6. Has the department failed to provide adequate protection to people in the most deprived areas of the country that are the most dependent on grant support to provide statutory services? 

Section 2.7 outlines the differential % changes that gave some protection, but not at a £/dwelling level.   Did this reliance of % change also give protection to councils that are now seeing spending power increases?

Q.  Given the evidence on the differential impact, is this considered to be effective?  What other options were considered and why were they discounted?   Why was no limit placed on the £/dwelling loss?

2.9 What assessment has been made to ensure that grant dependent authorities are still receiving sufficient additional spending power to meet higher spending pressures to meet statutory services e.g. – children’s social care (where pressures have been rising); concessionary travel costs; housing costs, council tax support costs.

Q.  Given the evidence provided to DCLG that the spending power for many grant dependent councils will fall below that of the least dependent council in the next few years due to the cuts in council tax resource equalisation, how can the Department claim that it is fulfilling its duty to parliament and that the spending power in the next two /three years will enable grant is adequate?

Q When did Parliament give permission for DCLG to no longer reflect needs and resources in Local Government Funding?  Where the implications of this fully spelt out to Parliament in terms of DCLG not being able to fulfil its duty to allocate funding to councils in a way that could give assurance that statutory services could be met?

The pressure on children’s social care has increased rapidly and differentially in some parts of the country which funding has been cut dramatically.  If the Department is no longer updating funding for needs how I it fulfilling its duty to Parliament to allocate funding to meet statutory services pressures.   The rising trend in the number of looked after children nationally and outside London is highlighted below.

At the same time as service pressures and national spending has risen, the funding for core social services support for children’s social care has been cut by around up to 40%.

Q What was the % reduction in the RNF formula needs assessment for Children’s Social care from 2010/11 to the 2013/14 baseline calculation?

Q Since the funding was added to the County level services funding baseline in 2013/14, how much has the county level funding been cut in  % terms in 2014/15 and what is the further cut to this tier of grant funding in 2015/16?

OTHER ACTIONS TAKEN BY DCLG THAT HAVE INCREAAE PRESURE AND RISK

What impact have the following decisions had (or have likely to have had) on the councils most dependent on grant funding –

1)     Grant topslices for New Homes Bonus?

2)     Grant topslices for Business Rate Safetynet?

3)     Inclusion of Council Tax Support Funding in the main funding block?

4)     Inclusion of Council Tax Resource Equalisation amount in the main funding block?

Q For which of these where were exemplifications of the impact of the decision prepared and considered by ministers?

Q Where there was evidence or a reasonable probability that there would be a disproportionate impact on the most depended councils, what other options were explored?

Q What actions were taken to follow up and explore suggestions for improvements to reduce risk that were received as part of the grant consultation process?

Q What action has DCLG taken to help councils cope with the considerable redundancy and severance costs that will result from higher cuts being implement in 2014/15 and proposed for 2015/16?   What assessment has been made of these costs and how they will impact on councils’ ability to deliver statutory services?