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Paper  5 - 27 September 2002 Meeting

ASSOCIATION OF HAMPSHIRE AND ISLE OF WIGHT LOCAL AUTHORITIES

27 September 2002

REVIEW OF REVENUE GRANT DISTRIBUTION,

INCLUDING THE AREA COST ADJUSTMENT

Joint report by Chief Finance Officers

______________________________________________________________

1                    RECOMMENDATION

1.1              That the Office of the Deputy Prime Minister and Local Government Association be informed of Members’ views, as set out in this report, and a letter be sent to MPs in Hampshire and the Isle of Wight. 

_____________________________________________________________

2                    INTRODUCTION

2.1              The Government has consulted local authorities on its proposals for a new system for distributing its revenue grants and seeks responses by 30 September.  The new system will be introduced next year, 2003/04.

2.2              The proposals are likely to result in losses of grant for authorities in Hampshire and the Isle of Wight, leading to significant council tax increases even after any floors for grant entitlement are applied.  In addition, cost pressures in excess of Government assumptions next year would also appear to point to relatively high council tax increases.  With spending on some local services such as Education and Police at an all-time high, it will be important to explain to the public why the council tax has to increase so much.

3                    CONSULTATION ON GRANT DISTRIBUTION

3.1              The consultation paper proposes new formulae to replace each of the existing service Standard Spending Assessments (SSAs).  The consultation includes exemplifications of a number of options for each service based on re-running the 2002/03 grant settlement, with details of the impact on each local authority. 

3.2              Each authority has the opportunity to respond to the consultation individually, but there may be some common ground on which the Association can make joint representations to the Government in the interests of the people of Hampshire and the Isle of Wight.  As the following tables show, there are very few services for which an option exemplified by the Government is the best for all member authorities of the Association.  It may be possible, however, to agree some underlying principles that the Association can support.

Table 1 – Best Options for each authority

Note:  some of these “best” options still result in a loss of grant - they are shown below in italics

 

Hampshire County Council

Isle of Wight

Portsmouth

Southampton

Districts

 

 

 

 

 

 

Education

EDU2

EDU3

EDU3

EDU1

n/a

Social services

 

 

 

 

 

  - Children

SSC3

SSC2

SSC1

SSC2

n/a

  - Elderly

SSE1

SSE1

SSE3

SSR1/SSD1

n/a

  - Other

SSO3

SSO3

SSO1

SSO1

n/a

Highways

HM2

HM1

HM1

HM1

n/a

Fire

FIR2

FIR3

FIR2

FIR2

n/a

EPCS #

EPC2

EPC3

EPC2

EPC4

option 2 (except

Havant 3)

Capital

CF4

CF2

CF2

CF1

option 2:- 6 DCs

option 1:- 5 DCs

Area cost adj

ACA5

ACA1

ACA5

ACA5

all: option 5

Resource equalisation

RE3

RE3

RE2

RE2

 option 1:- 6 DCs

 option 2:- 4 DCs

 option 3:- 1 DC

Fixed costs

FC2

FC2

FC2

FC2

both 1 & 2

 

 

 

 

 

 

# Environmental, protective and cultural services

 Table 2 – Worst Options for each authority  

 

Hampshire County Council

Isle of Wight

Portsmouth

Southampton

Districts

 

 

 

 

 

 

Education

EDU1

EDU4

EDU4

EDU4

n/a

Social servs

 

 

 

 

 

  - Children

SSC1

SSC1

SSC3

SSC3

n/a

  - Elderly

SSR1/SSD1

SSD1

SSR1/SSD1

SSR2/SSD1

n/a

  - Other

SSO1

SSO2

SSO3

SSO2

n/a

Highways

HM1

HM2

HM2

HM2

n/a

Fire

FIR1

FIR1

FIR1

FIR1

n/a

EPCS

EPC4

EPC2

EPC3

EPC3

all: option 4

Capital

CF2

CF1

CF4

CF4

all: option 4

Area cost adj

ACA2

ACA5

ACA2

ACA2

all: option 2

Resource equalisation

RE2

RE2

RE1

RE1

option 1:- 4 DCs

option 2:- 7 DCs

Fixed costs

FC1

FC1

FC1

FC1

both 1& 2

 3.3              Areas where there is some common ground are discussed below.

4                    BASIC ENTITLEMENT

4.1              The Government’s new formulae have a standard structure of:

Basic allocation + deprivation top-up + pay cost top-up + other top-ups.

4.2              From the exemplifications, it looks as if the Government has provided for the  deprivation top-up as a first call on the available resources, with whatever is left over allocated via the basic allocation per head of population/pupil/elderly person/road length, etc.

4.3              The Association may consider that this approach should be reversed.  The basic cost of services should be funded in full by the Government, with any balance of the available resources used to meet deprivation.  This would increase the size of the basic amount in each formula which should be beneficial for the Association’s members.

5                    AREA COST ADJUSTMENT

5.1              The Government’s new formulae retain the area cost adjustment (ACA) to cover the higher cost of providing services in some parts of the country, notably the South East and London, calculated using a general labour market cost basis.  This is to be welcomed.

5.2              Four of the five options exemplified by the Government for the ACA, however, will result in significant losses for all authorities in the Association’s area.  The fifth option would give very minor gains to Hampshire County Council and seven of the district councils.  The Isle of Wight has been particularly badly treated under all options.

5.3              It is difficult to isolate the effects of the various components of the proposed ACA options from the limited information supplied by Government with the exemplifications.  In these circumstances, it may be better to argue that the existing methodology, and the existing geographical boundaries for the areas of the country that benefit from the ACA, should be retained until a robust new methodology can be established. 

5.4              Some principles could also be supported:

·                    the general labour market methodology should be retained

·                    the Labour Force Survey should be used as a source of earnings data instead of the New Earnings Survey – this should benefit the South East

·                    earnings data should be smoothed over three years to reduce some of the volatility of the existing practice of updating the earnings data every year.

6                    RESOURCE EQUALISATON

6.1              The existing SSA system equalises the differing level of resources available to local authorities from their council tax bases, but only at the level of spending that equals SSAs.  There is no equalisation for spending above SSAs, which most local authorities now do.  As a result, authorities with high needs/low resources have had to raise their council tax for each addition £ spent above SSA by more than authorities with lower needs/higher resources, such as the Hampshire area.

6.2              To rectify this, the Government proposes a one-off redistribution of resources from lower need/higher resource authorities to high need/low resource authorities such as most London Boroughs, metropolitan districts and unitary authorities, particularly those in the north.  The worst of the options for the County Council would involve a loss of grant of £21m which would have a significant impact on council tax levels.

6.3              Portsmouth and Southampton gain under all three of the exemplified options and some of the Hampshire districts would make small gains under some of the options.  As a result, it may be difficult for the Association to reach a consensus on the Government’s proposals but there may be some points that could be put to the Government:

·                    higher spending as a result of local policy decisions should not be funded through a redistribution of general grant

·                    the resource equalisation proposals tend to benefit authorities that are already benefiting from the Government’s proposed high weighting in the new system for deprivation, as well as specific grants for regeneration. etc.  Double or even treble funding of these costs should be avoided.

·                    if large council tax increases are to be avoided, these proposals would lead to severe service cuts for many authorities at a time when the Government’s priority is to improve public services.  There would also be no guarantee that authorities that gain from these proposals will use those gains to reduce their council taxes.  The result could be an unplanned increase in public spending.

·                    if the Government now accepts that existing spending levels are justified, it should provide additional grant to meet its share of the costs, particularly for social services and waste management where there is clear evidence of underfunding.

·                    otherwise, there should be no change to the present system of resource equalisation.

7                    WASTE MANAGEMENT

7.1              The Government has asked whether there should be a separate formula for waste management.  Research commissioned by the County Treasurer for the Society of County Treasurers clearly established the need for separate treatment.  The Association is recommended to support the case for a separate formula, together with proper funding of such costs.

8                    COMBINING REVENUE SUPPORT GRANT AND NON-DOMESTIC RATES

8.1              The Government has proposed merging the revenue support grant (RSG) and the non-domestic rates (NDR) into a single ‘formula grant’.  NDR is currently returned to local authorities as a separate funding stream within the grant system.

8.2              Merging RSG and NDR will reduce the transparency of the grant system.  It would also destroy an important link between local businesses and local authorities.  NDR would cease to be a local tax earmarked for local authority services and become just another national tax alongside income tax and VAT etc.

8.3              Under the existing system, some authorities have a negative entitlement to RSG because their SSAs are relatively low and their council tax base resources are high.  As a result, their RSG is set by the Government at zero.  If RSG and NDR are merged, negative entitlements for RSG will be effectively netted out of authorities’ NDR so that their overall support from the Government will be reduced.  In 2002/03, six authorities nationally had negative entitlements to RSG, including Fareham and Hart.

8.4              The Association is recommended to argue against the proposal to combine RSG and NDR and to reaffirm support for the return of business rates to local control as a step towards widening the local tax base.

9                    COST PRESSURES

9.1              With inflation of basic costs running at about 3%, the Association’s member local authorities also have significant extra pressures on the cost of employing staff:

·                    increased National Insurance

·                    increased Pension contributions

·                    extra pay increases to reflect skill shortages

·                    changes resulting from Single Status.

9.2              Other cost pressures include:

·                    increased insurance costs etc.

·                    waste management/recycling etc.

9.3              The outcome of the Government’s spending review 2002 generally points to a council tax increase of over 6% without allowing for these pressures.

 

10                LOBBYING

10.1          It will be important to explain what is happening to the public, and the campaign should start with MPs so that they can influence Ministers as the local government settlement is formulated for next year.

 

 

JON PITTAM

CHRIS MALYON

County Treasurer

Director of Resources

Hampshire County Council

New Forest District Council

 Date:               10 September 2002
Annex:              0
Contact:            Ian Howell 01962 847540 e-mail ian.howell@hants.gov.uk

  

Last update: 17/09/2002
Author: Nick Goulder, Policy Manager

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