Local Government Finance Settlement

Lord Smith of Leigh Excerpts

Thursday 9th January 2014 Lords Chamber

Moved by

[Lord Smith of Leigh]

That this House takes note of the Local Government Finance Settlement.

[Lord Smith of Leigh (Lab)]

My Lords, it seems to have become something of a tradition that when the House reconvenes after the Christmas Recess I lead a debate on local government funding. The government settlement announcement usually happens later and later in December, so we do not have a chance for a debate before Christmas. I am pleased that the debate has attracted not just the usual suspects on local government, and I look forward to their contributions. I of course look forward to hearing from the Minister, who is the new face on the government Front Bench. Her predecessor, who is sitting behind her, will no doubt be listening to what I say with interest. I am glad that she does not have to respond today. I should declare my usual interests in local government. I am leader of Wigan Council, chairman of the Greater Manchester Combined Authority, and a vice-president of the LGA—as are others in this Chamber—and of SIGOMA.

Commenting upon the settlement, Sir Merrick Cockell, the Conservative chair of the LGA, said that it,

“confirms that councils will continue to be at the sharp end of public sector spending cuts up to 2016”.

He added:

“Councils have so far largely restricted the impact of the cuts on their residents. They have worked hard to save those services that people most value and have protected spending on social care for children and the elderly, but even these areas are now facing reductions. That impact will only increase over the next two years”.

I certainly agree with that statement, which was, however, made before the Chancellor said on Monday that there is another £25 billion of cuts in public spending to come.

In the settlement Statement, the Government made three interesting and key headline messages. First, they said that the cut in spending power was only 2.9%. Secondly, they said it was,

“fair to every part of the country—north and south, rural and urban, metropolitan and shire”.—[Official Report, 18/12/13; col. WS 151.]

Thirdly, they said it would be possible to deliver reductions by “sensible savings” and “eliminating waste”. I shall scrutinise each of those matters in turn. The concept of “spending power” of local authorities is an interesting, new, complex and extremely controversial way of defining spending. It includes a number of different sources of local funding—25 in total, the biggest being council tax and settlement funding. However, it also includes the highly contentious new homes bonus, to which I am sure colleagues will refer later. It also includes the relatively small amount of funding to lead local flood authorities. Members may be interested to know that funding for those authorities will decline by one-third next year. Perhaps in view of the recent weather, the Government might wish to reconsider that.

The headline figure of 2.9% is achieved by an interesting device of excluding the GLA. It may no longer be considered a local authority, but perhaps it still is. If you include the GLA, the figure increases to 3.1%. However, this time, when defining the spending, the Government have included pooled health budgets, which are the responsibility not of local authorities on their own but of local health partners. Those budgets are of course also included in the Department of Health’s figures, so there is some double counting there. If those figures were excluded, then the cut would increase to 5%. CIPFA, the respected local government finance body, says that the direct funding for local authorities has reduced by 9.4%. It also commented that the announcement was,

“stronger on spin and misleading presentation”.

The claim that this settlement is fair is simply disproven by the statistics that the Government themselves have provided. The average metropolitan area loses 4.2%, which is twice the loss in shire counties. In London, the average loss is more, 5.5%; and the contrast with shire districts is even higher. Chesterfield loses 6.9%, while the good citizens of Epsom and Ewell actually gain by 3.3%. There are huge gaps there.

The shift from direct funding through the grant system based on need to this “funny money” definition of spending power has meant that the more deprived parts of the country are losing grants at a greater rate than those less deprived parts. Surprise, surprise: the most deprived areas of the country happen to be Labour authorities.

The third contentious claim was that these cuts could be achieved by so-called sensible savings. That ignores the fact that this is not year 1 of any round of savings in local authorities. Ever since 2010, when the Government came in, there have been significant cuts, and they have continued. All the examples of low-hanging fruit—the things that people can take away—have gone. We are now into serious cuts in spending. My own local authority had to take off £66 million, will have done so by the end of this financial year, and faces a further £43 million in cuts over the next three years. Cuts at this level cannot be achieved by slicing and cutting; we are actually going to have to make significant savings in real services.

Local government, like everyone else, is facing a number of pressures to increase spending. We face inflationary pressures. Local authorities pay fuel bills, and we all know what is happening to those bills. We face demographic change, which increases the demand for services. In Wigan in the past six years, the over-65 population has increased by 19%. When you get to my age, it is good news that the population is living longer but there is a significant impact on local spending.

There are also new burdens famously being placed upon local authorities that are never fully funded. Sometimes they involve taking away existing grants and putting them into a new box. A couple of years ago, the Government cut the Social Fund and passed the responsibilities on to local authorities. Grants were provided for that, although they were inadequate compared with what had been spent previously. Next year, there is no sign of those grants in the settlement, so all the local welfare funds will now be paid for directly by local authorities.

The Government are probably not alone in misunderstanding the way that local government works nowadays and the way it has changed. Parliament, too, has not really understood the complex changes that are taking place. I come to this House and hear people asking for additional services, and putting pressures and demands on local authorities that, in themselves, may be desirable. However, we are not dealing with even a zero-sum game, whereby we have to find the money from existing resources. We are in a negative funding game, whereby we are having to find additional funding from other cutbacks.

Since Monday when I was back at work, I have spent time each day mainly on local government funding. Yesterday, I had to be back in Wigan to determine our budgets for next year. I have been a local councillor probably for more years than I would like to confess, but the language of what I am doing is now totally different from what I was doing even five years ago. In our budget we talked about “transformational change” and having really to think about whether we should continue to provide services at all. We talk about “building self-reliance” among high-dependency groups in our communities. We can no longer afford to fund those people at the rates that we have in the past. Despite all the pressures, we cannot exclude the big areas of spending in local government, which are adults’ and children’s services.

I want to refer to the system of local taxation. I think that I can see an established pattern in how local taxes change. Stage 1 is that a local tax becomes unpopular for some reason, probably fuelled by a media campaign. Stage 2 is when the Government respond by trying to mitigate the effects of the tax through a subsidy—they put in money to try to reduce its impact. On the whole, that does not work, so we get to stage 3, where the unpopularity continues. The Government therefore then move to stage 4: they abolish that form of local taxation and try to replace it with something else. We saw that some time ago with the rates, and in place of the rates we got the poll tax. However, that did not last too long and we then got the council tax.

What concerns me is that our current major forms of local funding—that is, the council tax and business rates—are both now at stage 2 of the process. Both are heavily reliant on subsidies from the Government to make them justifiable. The council tax—and I make no apologies for repeating my point—is still based on 1991 values. It is difficult to understand that when it applies to a house built last year, perhaps with a broadband connection, which an older house does not have. However, I shall put that to one side.

We now have layer upon layer of council tax freeze grants, which are effectively the Government subsidising the council tax. At what point will the Government think that they are no longer affordable? I am sure that such a point must come, so those grants will be reduced and we will get into a real mess.

I remember on several occasions, along with my noble friend Lord McKenzie and the noble Earl, Lord Lytton, debating business rates very late at night with the noble Baroness, Lady Hanham. We tried to persuade the Government not to go ahead with the change to the valuation that they were making in the then Local Government Finance Bill. We were unsuccessful. However, suddenly the Government rightly recognised that the valuation of business rates was not regarded by the business community as fair, so the Chancellor came up with a wheeze in the autumn Statement to reduce the impact of business rates. Therefore, we will again have a local tax which is heavily dependent—and will be dependent going forward—on government subsidy. I acknowledge that the Government have fully funded that but, going forward, another local tax is dependent upon funding from central government.

At some stage we are going to have to think of a system of local government finance which is really local, which really works and which has cross-party support. Perhaps the time to look at that is now, because those taxes cannot go on.

I believe that we cannot simply go on with the current approach to public services and public spending. Therefore, I welcome the Government’s announcement in the autumn Statement that they want to develop more place-based budgeting. That is the future in many areas. Also, through better healthcare funding they have recognised the importance of integration between health and social care. However, I am concerned about the pace and adequacy of those developments.

On many occasions the Prime Minister has talked about the need to do something about “troubled families”, as he calls them. We have two separate work programmes in government for dealing with troubled families. A recent report from the National Audit Office said that they were unco-ordinated and were not speaking to each other, and the DWP programme has managed to get only 4% of people back into work, which is far less than it was aiming for. This is a really important, dependent part of our population. We need to work together effectively on a local basis. We cannot do it on a national scale; it has to be done locally.

I read that over Christmas some 18,500 patients who were medically fit to go home were kept in hospital simply because no adequate care package was in place. That is a disgrace for all of us who are involved in care. I am not simply laying the blame at the door of the Government; we should all be ashamed that that happened. It meant that 18,500 families did not have a really good Christmas, but it also cost us money. If we are going to keep people in expensive acute care, we need to make sure that we serve them much more effectively and on a much more cost-effective basis.

At this point I had intended to say that I thought that 2014-15 would be a difficult and tough year for local government, but 2015-16 will probably be worse. I was then shown a news cutting from the West Midlands which said that Wolverhampton City Council had an emergency budget meeting last night at which it made cuts to avoid what it called “insolvency”. Technically, unlike the situation in America, local authorities cannot become insolvent, but there will clearly be an increasing danger in the next couple of years that local authorities will become financially unviable. Would the Minister care to say whether the Government have contingency plans in the case of local authorities becoming financially non-viable?

The seriousness of local government funding is now becoming apparent to everyone. We are not talking about peripheral services; we are talking about main public services. I hope that I can persuade my party to commit to start to reverse the system and put more money back into deprived authorities such as Newcastle, Newham and—dare I say it?—Wigan, and take the money from Surrey, Oxfordshire and Epsom and Ewell. This is a serious debate and there will be consequences. I look forward to the contributions.

--- Later in debate ---

[Lord Smith of Leigh]

My Lords, I thank noble Lords for their contributions to today’s debate, particularly the right reverend Prelate the Bishop of Ripon and Leeds. I wish him well in his retirement. This has been his last debate; he has made important contributions to this House.

There has been considerable agreement in the House, and certainly a passionate view, that localism is the way that we should go forward. Many noble Lords referred to the impact that the cuts will have in future on vulnerable people. My noble friend Lady Donaghy talked about the impact that they will have on the workforce, some of whom will lose their jobs, but those who stay in jobs have also faced a pay freeze for three years and now a 1% rise, so their real standard of living is going down.

I hope that I did not give the impression that the noble Lord, Lord Shipley, claimed that I did: that I thought that local government did not need to change. As someone responsible for local government finance, I began to make my decisions about the future in 2009, when I realised that things were going to get tough from then onwards, so I prepared my authority to deal with that. We cannot go on simply doing the same round—I think the Minister responded somewhat to that—we need to rethink the way we deliver all public services, not just local government. We need to do it on a place-based system.

There are many ways in which I could save money for the Ministry of Justice but, frankly, I am not going to spend a penny on that unless I am sure that I will get a return for it. That is the incentive I want from the Government. Tell the Ministry of Justice that we can keep people out of prison if we give them more support, but only if we get some incentive to put our investment in.

The Minister gave a robust defence of the Government’s position; I am not sure that she was on firm ground all the time. Spending power is a very arbitrary definition of what is going on in local areas. There is much in it; there is much left out. When we had a proper place-based settlement we understood how much money was going in and it was in the control not of local authorities on their own but of local authorities working in partnership with other agencies. We need to get the DWP to recognise that we are not going to get people into jobs from offices in Whitehall or Manchester—it will be local people on the ground who get people back into work. That will have the biggest impact on public spending, because families with incomes from employment, on the whole, do not depend on public services like those who do not have jobs.

I was a bit surprised when the Minister suggested that it was in local authorities’ interest to paint things in the blackest shades. I have never done that about my authority; I have simply pointed out where there are differences in the way that authorities are run. Noble Lords gave examples of death rates in different areas, which I think adequately illustrated that.

Early intervention is the key going forward, but in many areas of local government, we have limited ourselves to critical needs. When we have a Secretary of State who seems fixated with the frequency of bin collection, I think that says it all.

Motion agreed.