London would lose millions if grant formula changes

5 Aug 10
Proposed changes to the distribution of the formula grant for local government would leave the capital £100m out of pocket, London Councils is claiming
By Vivienne Russell

5 August 2010

Proposed changes to the distribution of the formula grant for local government would leave the capital £100m out of pocket, LondonCouncils is claiming.

The Department for Communities and Local Government last week launched a consultation on changes to grant distribution to come in from the 2011/12 settlement onwards.

But London Councils, which represents the 33 local authorities that make up Greater London, says suggestions to alter the Area Cost Adjustment would take £100m from London because it lowers the weighting given to labour costs in the formula. For example, the consultation is proposing to reduce the weighting given to highways maintenance labour costs from 60% to 40% and to older people’s social services labour costs from 80% to 65%.

This is because of a recent change to the way indirect labour costs – those incurred by contractors  – are assessed. Previously, the DCLG had gauged these costs using judgement, but now it is estimating them by looking at a sample of contractors’ accounts.

London Councils argues that this approach underestimates indirect labour costs because it does not take into account the labour the contractors themselves outsource.

‘In other words, the very problem facing councils is also faced by the council’s contractors – not all labour is employed directly, but is provided by other suppliers,’ the organisation says.

It wants the DCLG to complement the use of accounts with a judgement about labour that is not directly measured.

London Councils’ director of fair funding, Hugh Grover, saidthat the DCLG should not be tinkering with the grant formula at a time of great uncertainty for local government.

‘Why, at a time when councils desperately need stability does the DCLG doggedly insist on publishing a formula grant consultation?’ he told Public Finance.

‘Councils are faced with a double-whammy of distributional changes and a shrinking pot – and the DCLG has effectively turned this into a triple-whammy by bringing into play its inherently unstable four-block model.  

‘We have called for a much simpler freeze to each authority’s share of formula grant as the basis from which discussions around cuts should proceed. At least this would give a stable point from which to plan for the radical changes to services that will be necessary.’

The DCLG’s consultation on changes to the formula grant closes on October 6.

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