Local Government Finance Settlement

Lord McKenzie of Luton Excerpts

Thursday 9th January 2014 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, like others, I start by thanking my noble friend Lord Smith of Leigh for initiating this debate and for bringing to our deliberations both his expertise on local government finance and his practical experience hitherto of dealing with some of the worst consequences of recent settlements. However, I think that he admitted to us that options are beginning to be closed off, given what is before us today. I also congratulate my noble friend Lord Liddle on his return as an elected local councillor.

This has been a powerful debate with contributions from beyond the usual suspects. As my noble friend Lady Pitkeathley said, you do not need to be an expert in local government finance to understand the consequences of cuts and the benefits of quality public services. I am also grateful to my noble friend Lord Beecham not only for his contribution today but for organising an in-depth and very timely brief from Paul Woods, director of resources at Newcastle City Council. I thank the noble Lord, Lord True, for his interest in Luton, and I will share with him the representations that the council has felt able to make, given the savagery of the cuts that are proposed for us.

We share with the LGA concerns about the timing of the provisional settlement—a week before Christmas. The process was not enhanced by the unedifying spectacle of the Minister in another place having to be dragged to the Dispatch Box to answer an Urgent Question tabled by the right honourable Hilary Benn. As we have heard, the settlement covers the upcoming year 2014-15, with provisional grant figures for the subsequent year, and it does not make for happy reading. Councils will face significant further spending reductions up to 2016 and, as others have said, if the Chancellor should have his way—although we are trying to stop him having that—beyond. The challenge to local government could not be put more clearly than by the LGA:

“The next two years will be the toughest yet for local public services. By the end of this Parliament, local government will have to have made £20 billion worth of savings”.

As many noble Lords have said, 2015-16 will be the crunch year for councils and local public services. The noble Lord, Lord Tope, clearly had that view. It is a stark message indeed. The ministerial mantra, parroted in another place, of sorting back-office services and using reserves is a grossly inadequate response to the scale of the challenge faced by local government.

We accept that the Government have not been completely deaf to the assertions of local government in framing the settlement, and we welcome the change of tack in the reduction of money held back from councils, especially the new homes bonus, but without this matters would be worse. The noble Lord, Lord Shipley, referred to the safety net holdback, and we share some of those concerns.

The Government have been pushed into action on business rates by Ed Miliband, although they could do more in cutting business rates for 1.5 million SMEs. It is only right that councils are being fully compensated for the loss of business rate income arising from these measures, although they deserve assurances about when they will receive the cash. Perhaps the Minister can provide that for us.

Local government finance remains complex and we are about to enter the second year of the business rate retention era. All the more reason, therefore, why the Government should strive for transparency in the presentation of their arrangements, and this they have failed to do. Independent commentators have described the announcement as stronger on spin and misleading presentation than the technically sound explanation that councils and the public would expect. In particular, comparing such different councils as affluent Windsor and metropolitan Newcastle in an attempt to justify fairness shows just how out of touch the process has become. My noble friend Lord Beecham made that point. Time does not permit today to take stock of how the business rate retention scheme is working, although the LGA has already highlighted a concerning, emerging issue about the level of financial risks that councils face due to appeals and business rate avoidance.

One of the bones of contention—again dealt with by my noble friend—is the presentation of the overall settlement in terms of spending power rather than the settlement funding level. The former shows cuts of only 2.9% and 1.8% respectively for the two years, whereas the latter shows cuts of 9.4% and 13.2%. These are staggering amounts. The former includes significant tranches of NHS money to support social care, which will go to social care authorities only. Pooled funding, as my noble friend Lady Donaghy said, is to be welcomed, but the fund does not address the financial challenges facing councils and clinical commissioning groups in so far as it is bringing together resources already committed to existing activity.

The settlement funding level is the local share of business rates and the revenue support grant, the money available for statutory services. The latter has been cut by 17% next year and by 41% over the two years. So it is clear that the cuts expressed in terms of spending power understate the impact of changes to government funding of council services.

We need to consider not only the overall level of the settlement: its distribution is also vital. We dispute the Government’s assertion that it is fair. My noble friend has pinpointed this problem, in particular, and has identified the technical arrangements that are driving it. His analysis is right. A simplistic comparison of total spending power per household is meaningless without an understanding of the different spending pressures that councils face in meeting statutory demands and their ability to raise revenue through council tax and business rates.

What is happening under the settlement is that the spending power of the more deprived areas has been reduced, while that of the wealthier areas is being protected. This is an inevitable consequence of the cut to the resource equalisation component of the revenue support grant, especially in an environment where the RSG component overall will be a declining part of the settlement funding assessment under the business rate retention scheme. This unfairness can be depicted in a variety of ways but, given the regional changes in spending power over the two years to March 2016, London authorities will lose 8.2%, the north-east 7.2%, the north-west 6.5%, the West Midlands 6.1%, Yorkshire and Humberside 6%, the east Midlands 4.2%, the south-west 2.2%, the east 2% and the south-east 0.6%. The figures speak for themselves. What definition of fairness justifies this distribution?

By the end of next year, compared to 2010-11, the 10 most deprived local authorities in England will have lost six times more than the 10 least deprived. We should not be surprised, given that we have a Government who have delivered tax cuts to millionaires and the bedroom tax to the poor and disabled. We should be in no doubt that these settlements are pushing some councils, inevitably those covering the most deprived areas, to the brink of financial failure. We have heard from several noble Lords about Wolverhampton’s experience.

As to the protection of individuals, can the Minister confirm that the settlement removes for 2015-16 the identified funding—some £170 million—for local welfare provision which was meant to stand in the stead of the discretionary social fund? We join the right reverend Prelate the Bishop of Ripon and Leeds in probing that matter. We should go back to our debates on the Welfare Reform Bill to revisit the assurances that were given at that time because I do not think that they are being fulfilled.

The noble Lord, Lord Snape, and others refer to the fact that council tax support funding is not transparently identified in the settlement, and the fears that councils may be forced to reduce their support in line with the reduction in their settlement funding assessment. The LGA points out that council tax has already become more progressive and that the cut in central government support, which could amount to £1.1 billion, would make this worse. As for a council tax freeze, is it not the case that an increasing number of councils, including Tory councils, are struggling to hold the line because it is difficult to balance the books? Unpalatable choices are inevitable, given the cost of living crisis that already besets so many families.

It is difficult to remain optimistic despite the historic resilience of local government, and recognising the role that councils could play in delivering jobs and growth. Councils have had to innovate and have benefited from strong and imaginative leadership; we have heard from some of those leaders today. However, this settlement will test their resilience like never before. For the future—this deals with the point made by the noble Lord, Lord Shipley—they deserve restoration of fairness in the distribution of resources. There can be no going back to 2010; I agree with my noble friend Lord Liddle on that. I agree with my noble friend Lord Whitty on the devolution of powers over housing, and would say to him that there is an independent commission that Ed Miliband has set up to look at the financing of affordable housing and council housing. There should also be devolution of powers over planning, jobs and skills. Above all, we want local authorities to have more responsibility to be able to serve their communities in the way that they think best.

[The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Stowell of Beeston) (Con)]

My Lords, I am grateful to the noble Lord, Lord Smith of Leigh, for securing this debate today and, indeed, for his warm welcome to me in this role and in responding to this annual event for the first time. I should like to respond particularly to the remarks made by the noble Lord, Lord Beecham, about my right honourable friend the Secretary of State, Eric Pickles. All I can say to the noble Lord, Lord Beecham, is that it is such a shame because he speaks so well of you.

Noble Lords have covered a lot of ground in this debate and I may not have the opportunity to respond to all the points that have been put to me. I will do my best today. Where I am not successful, I will, of course, supplement my response with a follow-up letter which I will place in the Library of the House. I will just point out to the noble Lord, Lord Whitty, that we have a debate on affordable housing before the end of this month so we will be able to return on that occasion to some of the points that he raised.

The starting point in a debate such as this is to look at the context in which we are debating these matters and acknowledge that over the past three years the Government have had to take some tough decisions about the public finances. Tough, but these are now paying off as the economy gets back on track. My noble friend Lord True highlighted one prediction of the noble Lord, Lord McKenzie, in his contribution to last year’s debate which did not materialise. That was about councils becoming insolvent. It is worth reminding the House that the noble Lord, Lord McKenzie, also suggested last year that we were facing an environment of little growth and increasing debt, but as we look ahead, growth is forecast to be 2.4% this year. The Office for Budget Responsibility expects that jobs will be up by 400,000 and employment is at an all time high.

[Lord McKenzie of Luton]

Will the Minister tell me when government debt is expected to stop growing?

[Baroness Stowell of Beeston]

As the noble Lord knows, while we remain having to bring down the deficit, we still have to pay off debt but we are having to deal with less debt than we might otherwise have done had we not taken the measures that we have.

I shall return now to what we have done in terms of the changes we have made and people’s reaction to them. It is worth reminding your Lordships that, as regards the changes we have made to the way in which councils are funded, a recent survey showed that public satisfaction with council services has stayed the same or actually improved in 90% of cases. That is a real credit to local authorities. We are making progress but in order to continue to do so it is vital that we stick to the disciplined course that has been set. Like every part of the public sector, councils have had to shoulder their fair share of the responsibility to pay down the deficit and get the nation’s finances back on a stable footing. The noble Lord, Lord Liddle, acknowledged that the right honourable Alistair Darling, when Chancellor, said in 2010 that cuts would be necessary if the Labour Government were re-elected at that time. However, it is worth noting that the Labour Opposition have opposed all of this Government’s cuts to local government. My noble friend Lord Shipley was right to ask what the noble Lord, Lord McKenzie, would do if Labour were elected. I noted that he did not provide us with much information on that in his winding-up speech today.

Much of the comment today has focused on reductions in central government grant. However, concentrating on those grants misses the bigger picture. It is far more accurate to look at the overall spending power that councils have. Contrary to what has been said, spending power is the best available measure of resources available to councils. We have published the methodology and the data in full on our website. Spending power includes the money the councils raise through council tax, business rates and financial incentives. I am sure noble Lords will welcome being reminded that local authorities now retain 50% of those business rates, which is not something they were able to do previously.

This debate illustrates some stark contrasts between this Government’s approach and philosophy and those of the Opposition. The previous system made councils dependent on central government for their income. Councils got more money by painting the blackest possible picture of their area. Indeed, Andy Sawford, the opposition spokesman in the other place, said only this week that the Labour Party would return to this approach if it succeeded in winning the general election next year. The Opposition talk about so-called fair funding but what they do not say is which councils they would cut if they were to introduce their preferred approach.

In contrast, we have set up a system which inspires ambition and aspiration and rewards councils which go for growth, support businesses, attract investment, help create jobs, and which are absolutely focused on transforming their services to deliver the best possible outcomes. By that I mean the most effective and most efficient public services which best support local residents. Our system means that councils which respond to new opportunities see the benefits of their efforts. I remind noble Lords what my noble friend Lady Hanham said when she spoke powerfully about the flexibility that local authorities now enjoy. I give way to the noble Baroness.