Cut-price localism? By Peter Hetherington

1 Nov 07
The government wants neighbourhoods and communities to run more services. But with an eye-wateringly tight local government financial settlement, how will this be funded? Peter Hetherington investigates

02 November 2007

The government wants neighbourhoods and communities to run more services. But with an eye-wateringly tight local government financial settlement, how will this be funded? Peter Hetherington investigates

Shortly after delivering what many saw as the worst financial settlement for England's councils in a decade, the government this month produced an 'empowerment action plan' to channel more power to neighbourhoods and citizens.

A worthy ideal, where rhetoric cannot hope to match reality? Distinctly impracticable at a time of tight public spending, when even the most modest proposal to transfer power and assets from council to community carries a price tag? Another example of government working at cross-purposes, promising more while giving less? Perhaps all of these.

Ministers, naturally, don't see it that way. They are surprisingly upbeat. Most of England's 390 councils might be facing a 1% real-terms increase next year, with the prospect of below-inflation rises after that, but 'hey, cheer up', they exhort.

The mood music from Communities Secretary Hazel Blears – 'my whole approach is anchored in localism and devolution' – has struck a high, positive note. Ministers now believe that local government is crucial to delivering their ambitious place-shaping agenda by bringing a range of partners together under (potentially) a big, democratic tent.

'We have an opportunity to turn around a pervading sense of apathy… re-engage people with their local community and encourage people to take a more active role in making public services work for them,' says the minister who, to be fair, is so far proving extremely popular with council leaders.

Blears' devolution plan for neighbourhoods involves 23 action areas, from creating 'community kitties' in every authority to encouraging the transfer of municipal assets, such as redundant schools, to the grass roots. Eighteen councils have been named as 'empowerment champions' in the drive to help communities 'shape the services they rely on [and] take control over the future of their area to get things done'.

But here's the catch. All this is happening at a time when the government has ducked, seemingly indefinitely, the crucial question of reforming the way authorities are financed. 'They've put it in a box marked “too difficult”,' says a senior official close to Whitehall who regularly meets ministers. 'It's the missing ingredient in the whole agenda.' And a crucial one at that.

How is meaningful neighbourhood/community devolution possible when it's far from clear how local people can get access to the necessary cash to, say, fix the road or the pavement, cut the grass in the park or fund the recently transferred school-turned-community centre? All these deeply parochial 'non-statutory' spending areas – and opinion polls show they are the priorities for a majority of payers of council tax – have been squeezed by the government as more money is poured into health and education. So to argue that funding from hard-pressed town and county halls will somehow follow the transfer of functions and assets to communities is, according to critics, a pipe dream.

And all this at a time when council tax revaluation is off the agenda, dismissed as both impracticable and – more important – too politically sensitive; when alternative, local revenue-raising wheezes are similarly non-starters, and when a return to local control of the business rate is never discussed these days. No matter that council taxpayers are being asked to shoulder an increasing proportion of town hall funding. In 1993/94, for instance, just as the English council tax was kicking in, households on average contributed 21% to council revenue and business 28%; now the position is all but reversed – council tax yields 26% and the business rate just 20%.

Any director of finance will tell you that such a lopsided system is unsustainable in the medium term. Privately, some ministers accept the fact that the funding system urgently needs an overhaul, as long as it's after the next election. Politically, though, they acknowledge that it does not figure on Downing Street's radar screen, let alone its equivalent in Conservative central office, where shadow ministers are equally vague about how to fund local government – while, ironically, promising a localist revolution if returned to power.

In truth, the latest local government settlement for England, revealed in last month's Comprehensive Spending Review, has to be seen in perspective. 'While it's true the real-terms increase is very low, the last three years of the Conservatives (up to 1997) saw cuts of 5.3%,' recalls Sir Jeremy Beecham, Labour vice-chair of the Local Government Association. 'But it's certainly very tight.'

And things, let us remember, were so much worse in 1991 when the Thatcher government was mired in the poll tax fiasco and ordered a blanket cut of £140 in householders' town hall bills – funded by increasing VAT from 15% to 17.5% to raise the necessary £4.25bn. In short, the Conservatives – the architects of a creaking council tax system, after all – have little to bleat about.

So, in the context of the real cuts in local government during John Major's government, is next year's 1% increase all that bad, particularly after a 39% real- terms increase for councils over the past ten years, according to ministers?

The worst settlement in ten years? 'Well, we didn't use that phrase lightly,' insists Stephen Jones, director of finance and performance at the Local Government Association. 'We believe it is and we've looked back to see whether we can justify that. A key point to me is not just the settlement itself; it has to be set against the demands and expectations that are around.'

Jones is well versed in the ways of Whitehall: he was until quite recently finance director at Customs and Excise. So when he cites the great difficulty councils will have in meeting the government's Public Service Agreement on adult social care – published in the CSR – he has to be taken seriously.

'Putting it in rather colloquial terms, it says things will get rather better for people and that more will get social care which is personalised, attuned to their needs, and delivered when and in the way they want it,' he explains. He calculates that an additional 400,000 people will turn 65 in England over the next three years, adding about 5% to the number of older people. 'Now that is going to be incredibly difficult to achieve within the money that has been made available.'

And for care of elderly people, read a multitude of other areas covered by local councils where the government is demanding improvements and raising expectations – while authorities are tied into a financial straitjacket. Jones notes that despite ministers' professed commitment to localism and community devolution, they have signalled that they will still cap any council tax increases above 5%. 'That really bothers me – look at the demands,' he says.

Low-spending councils, particularly, are being pushed into a tight corner. Take two all-purpose unitary authorities: Wokingham Borough Council, in the old county of Berkshire – one of the most affluent parts of England – and the City of York, itself an island of relative affluence in the North.

Efficiency figures high on the political agenda of Wokingham, a Conservative authority. Graham Ebers, its corporate head of finance, recalls that it has reduced staffing costs by £2m over the past two years, with some redundancies, while making additional efficiency savings of £4m last year alone. But this year it faces spending an extra £1m on the environment, partly as a result of a Private Finance Initiative contract on waste disposal; an extra £1m on community care, mainly for elderly people; and £2m more on children's services. 'I have never known it so difficult, with such growth pressures on three statutory services,' says Ebers.

It's a similar story 200 miles north in York, where spending per head is among the lowest in the country. 'We live in an environment where we have to make significant savings every year (£4.8m in the current year alone) just to survive,' laments Peter Steed, York's head of finance. 'We simply don't get enough from government grant and the council tax to cover our costs. Our blessing and our curse is that we're average [in the complex funding formula for councils] and we tend to get left behind.'

York is not without ambition: it has helped create one of the best bus networks in the country, tied to a much-admired park-and-ride system to ease congestion in a tourist hot spot, and it funded a concessionary fare scheme for pensioners before the government's own initiative.

As one of Britain's key tourist destinations, you might think that York should be able to exploit its position to raise extra revenue, but no. Smart local taxes, so popular in the US and elsewhere, are seemingly impossible in centralised Britain. The city is even a loser with the business rate, which should offer it some consolation. In the grand Whitehall redistribution process, it's a net loser, it cannot keep all it raises.

Stephen Jones says things could get worse. Council finances might 'just about be manageable' for the first year of the three-year CSR cycle (2008/09) but the succeeding two years look bleak. 'Look at what's likely to happen on the formula grant in those last two years and we don't think there will be an increase in real terms,' he adds ominously.

'So councils will be looking at a rising demand for services, a formula grant that isn't – and for some a grant below inflation – and therefore they'll think “how are we going to balance the books?” It's that age-old dilemma of cutting back on services or putting up the council tax, which will become an increasingly difficult question for councils to answer.'

Of course, several weeks of negotiations lie ahead before ministers agree the finer details of next year's local government settlement in early December. Although effectively about £24bn has been tied up, Jones says another £40bn is still 'at large', covering areas from (ring-fenced) education to waste, transport, highways and neighbourhood renewal.

There is some good news for local government. Ministers have drastically cut the number of performance indicators for councils – from around 1,200 to just 198; scrapped ring-fencing on £5bn-worth of funding; and allowed councils to levy a supplementary business rate. But that won't happen until April 2010, and the LGA has calculated that, even if every council levied the maximum possible, only £600m would be raised. Set against the demands of local government, that is small change.

To be fair, however, a new age of co-operation between Whitehall and town hall seems to be dawning. Blears recently commented on the concordat between central and local government announced by Prime Minister Gordon Brown in the summer. She says the aim is to shape future relationships between the two sides and set out their respective responsibilities.

No one can doubt her overriding passion – fashioned as a local councillor and activist in Salford – to create stronger communities, with the clout to control their own destiny. At one level, the National Association of Local Councils, which represents 8,700 town and parish councils, is certainly excited by the potential of greater powers for its constituent authorities. However, John Findlay, its chief executive, wonders if the full financial implications of that transfer of power have been thought through. 'The way things are, I am not convinced that funding will follow any transfer,' he cautions.

Does the rhetoric match reality? Probably not. But perhaps we should give Blears some credit for trying to reform an institution that consumes a quarter of public spending, within her limited powers. Effectively excluded from those, of course, are the dizzying heights of finance and revenue raising. That's for someone else.


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