Local Government Finance Settlement

Viscount Hanworth Excerpts

Thursday 22nd January 2015 Lords Chamber

[Viscount Hanworth (Lab)]

My Lords, the finances of local government are an opaque matter. The sources of revenue and the categories of expenditure can be represented in various ways that can give widely differing and quite contrary impressions regarding the state of the finances and the severity of the financial restraints faced by local authorities. There is ample scope for bamboozlement by a Government who are intent on conveying the most favourable impression.

On 18 December in the Commons, Kris Hopkins, who is the Under-Secretary of State for Communities and Local Government, asserted that the overall reduction in spending planned for the year 2015-16 was a mere 1.8%. This figure relates to a wide category of expenditures that include various protected budgets, such as the education, police and principal health budget. However, the so-called settlement funding assessment, which excludes ring-fenced grants for education, but which nevertheless includes the ring-fenced new homes bonus and the ring-fenced public health grant, will decrease by 13.9 %. The wholly discretionary spending of local authorities will decrease by an even greater percentage. When matters are looked at in this way, we begin to get a more realistic impression of the stringency of local government finances.

Another aspect of the finances is the restraint that has been imposed on council taxes. Local authorities proposing to raise council tax by more than 2% will have to hold a local referendum on such a proposal. The high cost of doing so and the likelihood of a negative response will effectively prevent any authority from seeking the sanction of the local electorate. A recent report from the Local Government Association has indicated that since the abolition of the council tax benefit scheme in 2013 and its replacement by a localised council tax support scheme, there has be a significant increase in the burden of taxation borne by lower-income families, many of whom were previously exempted from the tax. These are the people who are suffering most from the curtailment of the services of local authorities.

A summary of the current state of local government finances has been provided in two documents of the National Audit Office published in November 2014, entitled, Financial Sustainability of Local Authorities, and, Impact of Funding Reductions on Local Authorities. These documents point to an estimated reduction in government funding of local authorities in real terms of a 37% between 2010-11 and 2015-16.

In the most severe cases that concern urban local authorities, there will be a real-terms reduction that is in excess of 40% between those two financial years. The question that one has to ask is: how have the local authorities managed their finances throughout a prolonged period of funding reductions? The answer is that, rather than increasing their locally raised income, which they are now largely disbarred from doing, they have reduced their provision of services and cut back on their staffing costs. At the same time, they have sought to increase the levels of their reserves to guard against financial uncertainties and to prepare for future shortfalls in revenues.

A glib answer that has been offered by the Government is that local authorities have been able to manage their finances by making substantial efficiency savings. “Efficiency savings” is a euphemism that bears some examination. Efficiency savings refer primarily to the financial savings that are made by reducing pay. This is achieved when services that have hitherto been provided by local authorities are outsourced to private contractors. By outsourcing the same services to a succession of suppliers, local authorities have been able to drive down the costs.

There are provisions in law that are intended to prevent the deterioration in wages and conditions when the activities and employees of one supplier are transferred to another. However, these provisions apply for a limited time, and they are easily evaded. This is a spurious concept of efficiency and, indeed, the further immiseration and alienation of low-paid workers must lead directly to inefficiencies in the workplace. There is a limit to how far this process of so-called efficiency saving can go. It is liable, eventually, to bequeath a large proportion of our public services to the surviving private suppliers, who will become monopolists serving multiple local authorities. I will end by saying that I would favour the replacement of council taxes by a local income tax and a graduated property tax, levied on both buyers and sellers at the time of a sale.