Local Government Finance: Formula Grant Distribution ODPM Committee 6 Dec 2002

MR CHRIS BILSLAND, Council Member and Vice-Chair of Public Finance and Management Board, and MR VERNON SOARE, Policy and Technical Director, Chartered Institute of Public Finance and Accountancy (CIPFA), examined.

Mr. David Clelland (Tyne Bridge): I wonder if you could tell the Committee, in simple terms, we are all simple people here, what are the principles CIPFA believes should underpin the local government finance system, and in particular the grant distribution system?

(Mr Bilsland) In simple terms, basically we are looking for a grant distribution system which allocates funding fairly, that is the overriding consideration, and obviously equalises local authorities' different needs and resources. What that means in practical terms is that we expect the system to be stable, so that local authorities can plan their financial affairs with some certainty, and we recognise the conflict there is between having a system which is fair and stable and the need for it to be corrected on a regular basis. We feel the system should be as not complex as possible, or as simple as possible, but I suppose that overarching all that is we look for the system to be transparent. There is a large amount of money being allocated here on a formula basis, there are bound to be complications in it, bound to be decisions taken, so whatever the end result we are looking for transparency in the process. I think our final comments on the keeping support is that this must always be a system for distributing grant, it should never be used for other purposes, such as, for example, being a proxy for calculating spending needs.

Mr. David Clelland (Tyne Bridge): Do you think the Government has acted in accordance with such principles, or indeed with anything?

(Mr Bilsland) It is early days. I think most people are still interpreting the announcement that was given yesterday. But certainly from the Minister's statement it is clear that the Minister is trying to conform with many of those principles, at first sight.

Mr. David Clelland (Tyne Bridge): Do you think he has succeeded?

(Mr Bilsland) The proof of that will be in the eating really, but I think it still looks as though, behind what looks to be a simple methodology, of having a basic fund plus top-ups, there is still a very complicated formula behind it. In terms of this being a system for distributing grants, we note there are still the comments about schools funding and having to pass that on. So it looks as though the jury will still be out, I think, on whether the Minister has succeeded.

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COUNCILLOR NICK SKELLETT, Chairman, County Councils Network; SIR ROBIN WALES, Chair, Association of London Government; GRAHAM BIGGS, Chair, Professional Officer Group, Sparsity Partnership for Authorities delivering Rural Services (SPARSE); examined.

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Mr. David Clelland (Tyne Bridge): I think Councillor Skellett has touched on my question about resource equalisation, but could I ask him about the PricewaterhouseCoopers study on Additional Education Needs. Has he any observations on where the initial sample was drawn, given the fact that of the 37 authorities none was a county council? Apparently, the sample on which they drew up their report, the 37 education authorities, none of them included a county council?

(Cllr Skellett) We were not invited.

Mr. David Clelland (Tyne Bridge): But you will have your observations on the results; do you think that has affected the results in any way?

(Cllr Skellett) The basic entitlement in education is reasonable, in our view, it is 80 per cent. We think it should be high, given the national pay formula for teachers across the country. But I have got no more observation on that; it is clearly a deprivation issue. But I would say that, in addition, coming back to partly the previous point, deprivation factors are heavily built into the existing formula for assessing an authority's requirements overall, and between inner London and our county there is a difference, in some cases, of 250 per cent between these factors on SEN. So we do not need resource equalisation to make up for deprivation, because it is already heavily there in the underlying formulae, and in social services for children it is even more bizarre; in central London 0-17 range children receive over £600, in Buckinghamshire it is £87, in Surrey it is £90. So the underlying formulae, however inaccurate, do pick up quite heavy deprivation factors, including the SEN. So the point about resource equalisation, which my colleague touched on, is that we do not need that to compensate for deprivation, deprivation is heavily weighted in the underlying formulae, and the formulae produce what the counties and mets and others require to produce a standard level of service in special education needs or social services, and when you spend at that level, for that same level of service, you expect to pay the same level of tax across the country. And it is moving away from that principle which we think is the big constitutional issue this time round.

(Sir Robin Wales) I think I would say, I would not comment on specifics, I would be surprised if he had not picked up appropriate authorities in that, I certainly think that would be something you would expect to look at. When we talk about deprivation, I think the problem with deprivation is, you can slice it up but what nobody is able to actually put together is just the cumulative effect in London, and indeed some of the bigger mets, we have to be reasonable about that. Things like, whole classes change in London, the mobility is spectacular. We have got 45,000 asylum seekers, thousands and thousands of refugees, in mental health 158 detentions in London per hundred thousand, the next highest is 99.

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COUNCILLOR STEPHEN HOUGHTON, Chair, and MR STEVE PICK, Treasurer, Special Interest Group of Municipal Authorities (SIGOMA); STEVEN HUGHES, Director of Finance, London Borough of Brent, High Ethnicity Authorities Special Interest Group; examined.

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Mr. David Clelland (Tyne Bridge): Could I ask both organisations if you could summarise any key concerns you have on points of principle, as opposed to specific distributional issues, in relation to the Local Government Finance review and the resulting proposals in the July 2002 consultation paper?

(Mr Hughes) I think many of the things that they have done are to be welcomed. My fundamental belief is that the world is too complex to capture any simple formula, and that any formula is bound to be a compromise between different competing aims. And it is inevitable, therefore, that there will be authorities, and including authorities in my own organisation, who have not done as well as others, and there will be complaints from some, and other people who have done rather well probably will not say very much. And grant distribution, because it is a zero-sum game, is always going to be unpopular and difficult. I think that is the fundamental position you would start from. There are certain things which I think are essential to have done. I think the change on resource equalisation was absolutely essential. I think the current position was unsustainable really, we had a situation where, effectively, local authorities were spending considerably above SSA and the Government was happy for them to do so, but not to reflect that within the SSA meant that taxpayers in high need in low council tax areas were paying a higher level of tax for the same level of service.

(Mr Pick) Generally, I agree with my colleague's comments there. I think certainly SIGOMA authorities' point of view would be that their needs were reflected more by their spending than by their SSAs, in the past, and hopefully the settlement has gone some way to addressing that. I think one of the biggest concerns more as a professional officer is the predictability issue, and I think it is essential that we do start to get some forward indications of future years' ceilings and floors, in terms of planning. It has been a very difficult period for local authorities in planning terms, knowing the uncertainty of the formula review. I think we need to try to instil as much certainty as we can now into three-year cycles, that would be the biggest plea, I think.

Mr. David Clelland (Tyne Bridge): Do you think the Government has conducted this review in accordance with its own principles?

(Mr Pick) Yes.

(Mr Hughes) I think the difficulty has been, and someone has already said it, that we had a three-year freeze in the formula, and rather too long was spent deciding that they were not going to move away from the formula and rather too little time has been spent doing the fundamental review. And that has meant that there is considerable work still to be done, and whether or not that will happen in future years is unclear. And I think the other issue that I would raise is that, while the population figures from the Census have been included, none of the other factors which have an impact on distribution have been, are available in time, and because of the freeze they are not going to be used for the next three years, that is at least our understanding of the situation, and so some very important information is not going to be used for some considerable time. And obviously I am representing high ethnicity authorities, and one of the important things that has happened over the last ten years has been the distribution and numbers of ethnic minority communities across the country. And it was, and it is, quite important that that is properly reflected within the formula, and at the moment it will not be, although some of the education information has come from school counts, as opposed to from Census, and that is good, but in the main we are still using plenty of information dating back to 1991, and I cannot believe that is satisfactory in the long run.

Mr. David Clelland (Tyne Bridge): In relation to the settlement and on a scale of ten, how happy are you this morning?

(Cllr Houghton) Obviously, we are still working through the figures, we have seen the headlines in the press and obviously the headline figures the Government have released. We have been here before with previous settlements, where it looks good on the face of it, then when it is unpicked the position might be slightly different.

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RT HON NICK RAYNSFORD, a Member of the House, Minister of State for Local Government, the Regions and Fire, ROBERT DAVIES and BOB LINNARD, Office of the Deputy Prime Minister, examined.

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Mr. David Clelland (Tyne Bridge): But is it reasonable to say that authorities have four weeks for consultation when they are actually going to have only two weeks with the information?

(Mr Raynsford) They have four weeks for a consultation on their provisional settlement, which lets them know what the consequences are. I think a lot of authorities looking at these figures, knowing that there are real-terms increases, in many cases substantial real-terms increases, will feel very pleased with the settlement. Some will be worried, I accept that entirely, we will make provision to hear their representations and they will have the information to enable them to make those representations early in the new year.

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Mr. David Clelland (Tyne Bridge): Could I ask about the Environment, Protective and Cultural Services block. Could we know how the Department has selected the factors and the weights used in the formula that the Government attempt to use to distribute the SSA provision for this block to district and county services?

(Mr Raynsford) What we have sought to do is, recognising that this is a block that covers a very wide range of services, what we have tried to do is develop a few indicators that indicate what drives costs generally, accepting that we have to use proxies in some cases. If we tried cumulatively to put together evidence from all the elements that go to make up the EPCS, we would end up with an immensely complicated formula with a lot of the elements cancelling each other out. So what we have tried to do is work on those items that are significant cost drivers, and that has been the basic principle behind the EPCS approach.

Mr. David Clelland (Tyne Bridge): But do you have any evidence that the cost of providing this full range of services will be met by the formula which you announced yesterday?

(Mr Raynsford) We believe it is a better basis than any other that has been put forward.

Mr. David Clelland (Tyne Bridge): Yes, but do you have any evidence for it?

(Mr Raynsford) We consulted, as you know, and we published four separate options. We based our findings on EPCS 3, with some modifications, and I know there are people who would argue for different elements. For example, we removed the 'overnight visitor' indicator because we felt that was probably not justified; some authorities would argue that that should have been retained. There is a question about the weight for sparsity; again, it might be argued that that could be greater, or, equally, density. These are the kinds of argument that come forward. And we have considered all the evidence, we consulted, as you know, we looked at the responses and we felt that a modified form of EPCS 3 was the right basis for the allocation.

Mr. David Clelland (Tyne Bridge): We understand that the Formula Review Sub-Group had its first meeting in June 2001 and reported in May 2002. Are you satisfied that they had enough time for in-depth research?

(Mr Raynsford) A great deal of work was done on EPCS during the course of the preparations, but, as is always the case, there are differing views from different elements in local government, and the views that came from SIGOMA, on the one side, as against the Association of London Government, on the other, reflected the different interests of different groupings within local government. We have to try to form a judgement between those various submissions as to what is the best, and we think that the new EPCS framework, as I have said, does give us the best basis for determining the allocation. But I am not going to pretend for a moment there are not some who would argue that there might be different ways of doing it.

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Mr. David Clelland (Tyne Bridge): There was no bottom-up analysis though; was that related to the limited time available for research?

(Mr Raynsford) When you say bottom-up analysis?

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Mr. David Clelland (Tyne Bridge): Apparently, work is still continuing on the question of SSA blocks formulae for waste and transport; is this likely to have an effect on the EPCS formula in the immediate future?

(Mr Raynsford) As I have already said, we do believe that certainty in local government is what ideally we should be helping, and we think most local authorities would like a degree of certainty. So, while I have not absolutely ruled out changes, for the reasons you understand, because work is being done, we would be reluctant to incorporate many changes in the methodology which we have set out in yesterday's settlement. We certainly want to give local government as much certainty as possible in the period ahead.

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Mr. David Clelland (Tyne Bridge): Just on the question of floors and ceilings, how is this going to affect all-purpose authorities? Could it be that some of them will not be able to pass on the guaranteed level of funding to their schools without increasing council tax, as a result of this?

(Mr Raynsford) It is up to each local authority to reach its own decision, obviously, on its allocation of resources and its budget within the broad parameters that we set. The Secretary of State for Education has always made clear his, or her, concern about ensuring that money is passported through to schools, and I have no doubt that that will continue. But, nevertheless, the ultimate decision is one that is taken by local government and authorities will need to form the best judgement that they can. We have tried to put in place, through the floors and ceilings, a framework which gives every authority a guarantee of an above-inflation increase and makes life easier, particularly at a time when there has been quite a significant change in the methodology, as well as in the data, which therefore has an impact on the distribution of resources between authorities, and we think that that helps. But you cannot have a position where there is a fairly major change, such as the one that we have proposed and announced yesterday, without there being some authorities doing less well than others. And while those authorities that are up near the ceiling are all obviously very pleased with their outcomes, there are, of necessity, in any such change, some that are going to do a lot less well. So we felt that the ceiling at 3.5 for education and social service authorities was an appropriate level to safeguard those authorities from the consequences of what otherwise might have been a much more difficult position for them.

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Mr. David Clelland (Tyne Bridge): For how long do we expect the floors and ceilings system to be in existence, and how many years is it going to be before it is not necessary any more?

(Mr Raynsford) We expect it to be a continuing part of the system. We have not given a definite end date at all, and, as I indicated yesterday, we do not see an end date. The system is helpful, because it gives greater certainty to local government. And change is not just a result of methodology change, change can occur because of data changes. As we have seen with the Census data this year, without a floors and ceilings framework, it is very difficult to safeguard authorities against arbitrary changes that can flow from, for example, change in Census data, and therefore we see a continuing role for floors and ceilings indefinitely.

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Mr. David Clelland (Tyne Bridge): Would it actually be possible to examine the statistics to show how the labour costs in Merseyside are so much higher than the labour costs in Tyneside, for instance?

(Mr Raynsford) I would certainly undertake to let you have a detailed note on this, but I cannot, I am afraid, offer you the detail on it today.