Many local authorities have fears about the fairness of the 2012/13 grant settlement as a base for any new finance system. In resource equalisation in particular there is a significant cause for concern
In responding to the consultation on the Local Government Resource Review, councils will be raising issues such as: the funding baseline; the set aside; safeguards for areas with low business rates and uncertain growth; managing risk; pooling; the opportunity of tax incremental financing; the reset period and top-up and tariff arrangements.
A further key issue is the need to have a funding system that is as fair as it can reasonably be, underpinned by transparent and meaningful principles. This will require an open and informed debate about these principles, as well as an in-depth consideration of the options for changes.
For many years ‘fairness’ has been a key principle, with funding distributed to reflect differences in needs as well as to equalise for differences in the ability to raise council tax income from a standard Band D council tax. In recent years, principles of stability and predictability have grown in importance and now a new principle of incentivising councils to support growth is proposed.
An important question is how far the move to accommodate these new principles should undermine the fairness of the grant system and what is the most appropriate balance to be struck between them?
Many people are unaware of the extent to which resource equalisation has been eroded or the scale and impact of the change. This is partly because of the way resource equalisation is shown in the Formula Grant model as a negative adjustment with the proportion unchanged at -26.6%.
The reality is very different because the cash value of the adjustment has been cut by almost £1bn, from -£6.55bn in 2010/11 to -£5.56bn in the 2012/13 provisional settlement. The effect of this is that while the national average Band D tax is £1,439, the marginal protection of the resource equalisation adjustment appears to have fallen to around £1,035 in the proposed settlement for 2012/13.
With council tax bases relatively unchanged, and Band D taxes frozen, the need for resource equalisation has not reduced, whereas the equalisation adjustment has been cut significantly.
This also results in an unintended consequence of a larger cut in funding to councils that have the greatest number of students. This is because the resource equalisation arrangement is the way that councils are compensated for the loss of council tax income due to the national council tax exemption for student properties. It appears to have fallen by around £380 for every Band D equivalent student exempt property by 2012/13.
The reduction in resource equalisation is part of the reason why there are much bigger grant cuts in poorer areas of the country. While the cut in spending power is under £25 per person for wealthier areas, the cuts increase to over £125 per person in some of the most deprived Northern and inner-London councils.
Council tax resource equalisation was introduced by the Conservative Government in 1993/94 and is so important because there are such wide variations in council tax bases around the country and because the proportion of exempt student properties also varies significantly.
The North East has 56% of its properties in Band A and can raise significantly less council tax income from its properties than a wealthier region such as the South East, which has only 9% of its properties in Band A. With these very evident differences, adequate resource equalisation is critical to fair funding.
The decline in resource equalisation can also be seen in at least two other decisions about resource distribution:
- the way in which the Housing Bonus is calculated – which gives more money to areas with higher council taxbase, with no resource equalisation adjustment;
- the calculation of the Council Tax Freeze grant, which allocates the 2.5% compensating grant uplift with no adjustment for resource equalisation
The grant system compensates councils for the national student council tax exemption through the way the resource equalisation adjustment is calculated. The more student exemptions the lower the council taxbase, which is compensated for through the resource equalisation grant adjustment.
Nottingham has the lowest taxbase in the country and the highest proportion of exempt student properties at 12.5% (9,772 Band D exempt properties) in 2012/13. Their loss of funding from the cut in the resource equalisation adjustment for student properties could be up to £3.7m.
While the national average for student exemptions is 1.4% of the taxbase and the proportion for majority of councils (246) is less than 1%, there are a small number of councils with much higher proportions of student exemptions.
I am convinced that the 2012/13 settlement is not a fair funding starting point for several reasons (not just the cut in resource equalisation).
The need for improved fairness and restoring resource equalisation are key issues to raise in the consultation response, in particular into question 15 in Technical paper 1. Restoring the value of the resource equalisation adjustment to its 2010/11 level of -£6.55bn as a minimum is likely to require an increase in the resource equalisation proportion from -26.6% to around -31.6%, with a compensating +5% increase in the proportion for the needs and/or the central adjustment.
Without a correcting adjustment, the significant reduction in resource equalisation means that councils can no longer provide the same level of service by charging a similar Band D tax. With restrictions on council tax increases this would mean making deeper cuts in revenue budgets, putting greater pressure on the delivery of core services, such as social care. It is also having a negative economic impact as larger cuts in funding means a higher loss of jobs in both the public, private and independent sectors.
I hope that there will be a full debate about the importance of fairness and the relationship and balance between the key principles, including resource equalisation. Restoring fairness in the council tax funding arrangements is essential to give confidence about potential future changes to Business Rate funding.
Paul Woods is director of finance and resources at Newcastle City Council
