Local tax reforms begin to impact

Behind the cloud of austerity that obscures so much, a quiet revolution is happening in local government finance in England. 

Authorities are currently setting their budgets for 2013/14 and they are only at the start of the formal process, but anecdotally the abolition (after eighty years or so) of a needs based general funding formula and its replacement with a system of partial retention of business rates income is having a more immediate impact than many thought it would.

Over time it is fully expected that authorities in areas where the economy is growing will do better than those areas where it is contracting or stagnant. The assumption up until now has been that the first year of the new system will see relatively little effect, because funding in year one is supposed to be the same as the funding each authority would have received had the Formula Grant still been in place.

But some authorities are already planning to collect more business rates next year than the Government ‘baseline’ predicts, while others are indicating that they will struggle to meet the baseline figure.  This is because the baseline is calculated on an average of several years past performance, and the business rates system is surprisingly volatile in the amount of cash it generates. 

This is interesting because it increases the prospect that rates retention will make a noticeable difference to local government spending decisions quite quickly – probably before the next round of Council elections, and what is more, before the next General Election.  

For authorities that see their futures are residential rather than commercial, rates retention is mirrored by the New Homes Bonus, which provides extra income on a temporary basis to authorities that grow their council tax base and again is intended to act as an incentive to authorities to allow and encourage the tax base to grow.

What is completely unknown, of course, is how the new system will change things in the longer term.  The mechanics of the new arrangements will alter the distribution of funding, but the impact of this will be watered down by periodic ‘resets’ which on the face of it are intended redress some of the balance in favour of authorities in greatest need.  This avoids the ‘Detroit’ effect in which economically moribund areas gradually lose their capacity to generate tax income.  But if the new system is kicking in more quickly than many expected, more change can be expected between resets than might previously have been assumed. 

Not that the old system ever adequately provided for need. The introduction of damping arrangements over recent years had already broken any last link between the analysis of need and the amount of money authorities actually received.  When resets take place they are also likely to be hedged round with arrangements that stop the funding of individual authorities changing too much in any one year. 

So in one sense the new system could be the worst of all worlds. It will have provide an imperfect relationship between funding and spending need but also an imperfect relationship between funding and economic growth.  Over time it is hard to see how a ‘postcode lottery’ of local authority provision can be avoided.

At least under the new system it should be clearer to local authorities what they need to do to get more money.  The Government hopes for a sea change in the way local authorities see their local economies and engage with the Government.  The old system of needs related grants was seen as a disincentive for authorities actively to manage economic development but also encouraged authorities constantly to approach the Government with the begging bowl.   In future, the Government  expects local authorities to look closer to home to meet their income needs.   That should be a considerable shot in the arm for local government.  

It would be nice to think that the changes will encourage local authorities to take a harder look at how their activities can create wealth.  Unfortunately, even in areas where the local economy is growing strongly,  the effect of austerity will mean that all authorities will still be making cuts, but some authorities will have to cut further, deeper and more quickly than others.  This probably means the begging bowl will not be consigned to the attic just yet.

Another consequence is that local government finance has suddenly become a whole lot more complicated, which will make it harder for everyone, including governments and voters to understand what is going on.

The old system was supposed to work in such a way that differences in spending choices were reflected in the relative levels of Council Tax.  Under the new system,  authorities will still differ from each other according to how they manage costs, but they will also now differ more strongly than in the past in the way they manage tax income.  This means that if my authority now sets a higher Council Tax or makes bigger spending cuts than  its neighbours, it might be because they are profligate and inefficient, or it might be because the Council next door is the one with the new estate and the out-of-town shopping centre.

Rates retention will change the way we all think about local government finance in England in unpredictable ways, and the indications are that it may have a more immediate impact than expected.

Too small to fail

Perhaps this blog ought to be called ‘Too Small to Succeed: Too Important to Fail’.    The saga of the small District Councils the sustainability of which has been called into question by cuts in Government grants rumbles on. 

I wrote a few weeks ago about West Somerset, the nation’s smallest District  Council which has revealed that its finances are unsustainable in the long term because the pressures for growth on its expenditure cannot be matched by an increase in income.   This is the problem for the whole of local government in microcosm unless grants one day start to increase again, although some lucky authorities with growing Council Tax and Business Rates tax bases may escape the ultimate consequences.   The smallest Districts are hit first because their overheads are highest in proportion to overall spend.

 

Since what may become known as the ‘West Somerset Question’ was posed, the Government has come up with its chosen solution, which it is reported is to suggest West Somerset become a commissioning Council, outsourcing provision of services to others and reducing its overhead costs to a minimum.

This kind of things works- up to a point.  Clearly larger providers, such as neighbouring authorities or the private sector  can spread costs more easily and arguably the private sector has more acumen and more leverage when it comes to reducing costs.    But this can only be a temporary solution if austerity continues because it does not address the fundamental issue of growth in demand outstripping growth in income. 

Which underlines the problem, not just for small Districts but for all local authorities, that the often expounded solutions such as outsourcing and shared services in themselves do not do much more than buy time. There are limits to what even the most enterprising provider can do to keep making services more and more efficient.  Two other downsides to arms length provision- the cost of contract management and a risk of loss of democratic accountability are worth mentioning in passing and perhaps we will return to them in the future. 

Economists make the point that service industries, being people based, find it difficult to become more productive other than by managing access channels and moving to greater self-service.   Thus the doctor no longer visits you; you visit the doctor, and the bank offers better terms on investments if you agree to manage the account online.   Productivity improvements in services come from redesigning processes and asking people to do more for themselves.   This is the way forward, in my view, but in the public sector there is a limit to the pace at which this kind of change can be accomplished, the main blockers being ‘The Two V’s’ –the vulnerable… and votes.  

That doesn’t mean arms length providers are not worth considering, of course, because bringing in commercial expertise and the capacity to innovate can help find the longer term solutions, but simply changing the name of the provider is not going to be enough.

Just because a local authority is small in size doesn’t mean that is not vital to its community, and it would be shame if local authorities were forced to become less local in order to become more efficient.  Chubby Cat’s initial suggestion for the small Districts, which was to provide extra grants subject to the small authorities showing they had taken certain efficiency measures has been scotched by Government.  No more money.  Instead we have a solution which kicks the can down the road again – perhaps far enough for the economy to recover and bail us all out. Let us hope so. 

Planning for the Apocalypse

A couple of weeks ago, I wrote about the case of West Somerset, England’s smallest District Council which, an LGA report says, will inevitably become financially unviable within a few years.  

The problem for West Somerset is that its capacity to raise additional cash in the teeth of further funding cuts is not sufficient to meet the growing costs of services.  No doubt there are people at CLG who would call this ‘apocalyptic’ but every time one picks up a paper these days, the end of austerity seems to be another year away. In those circumstances, sooner or later an authority is going to run out of wriggle room.

It begs an interesting question that we may need to broach more than once over the coming years; what happens if a local authority goes bust?

This is my view – and the disclaimer is that I am not a lawyer, and neither have I had the time to research the law at length, just to confirm one or two things I thought I already knew.   This is what I think.

The most likely way for a Council to get into financial hot water is to be unable to set a balanced budget.   Unless an unforeseen disaster occurs which leaves a local authority with unaffordable additional costs (in which case the emergency funding arrangements called the Bellwin scheme may well kick in),  local authorities are unlikely to become insolvent in the way businesses do.

There is no such thing as bankruptcy or administration for local authorities but if authorities get to the stage where they start to run out of cash and are sued by their creditors,  things will have gone seriously wrong with the alarm system. It’s much more likely that officers of the Council or its auditors will see the situation coming and warn that the Council is unable to set a legal budget. The threat should  normally be visible at least a year or two ahead.

If that happens, the chief finance officer is duty bound to issue a warning notice to the Council and for a period, until that warning notice is dealt with, all major spending decisions are on hold.

Imagining a situation in which the authority is unable to solve the problem itself, the threat of the commissioners is a sanction that gets mentioned from time to time. As far as I can see, Eric Pickles has no power to take over an authority just because it is in financial difficulties.  Indeed, this is a sensible way for the law to be framed because it could become an easy way out for local authorities to spend all the money and then throw the problem at Minsters to sort out.

The Secretary of State does have powers, on the other hand, to take over the running of services if the Council is failing to perform.    But is it sensible to wait for the impact of financial ruin to bite before intervening? 

If there is nothing the Council can do within the law to correct the financial position, which would be the case if the authority is financially unviable, then it probably won’t be long before everybody ends up in a room at the Department for Communities and Local Government, and the solution will come down to good old realpolitik- the English constitution at its best. 

But even this would be a failure in relation to authorities like West Somerset, whose problems have been highlighted several years in advance of impending doom, with plenty of time for Government – and it does come down to Government - to address the problem.

If the past is anything to go by, perhaps the answer for authorities like West Somerset lies in the local government finance system, with its seemingly endless capacity for tweaking, to produce the desired outcome.  The Isles of Scilly and the Corporation of London already have special grant arrangements because of their challenging size.  One possible solution is that small Councils will be given extra funding in some way, and that could likely be linked to some strings, such as a requirement to share certain costs with neighbouring authorities.

Of course, this interesting thought experiment leaves out several important groups of stakeholders, the authority’s staff, its contractors, and last but far from least, its residents and service users. The potential impact on these largely innocent bystanders underlines the importance of forward planning and West Somerset should be praised for doing its job in that respect. 

Small or large, it’s not a good time to be an outlier

This week, within hours of each other, two very different local authorities announced causes for concern about their future financial viability.

West Somerset (know to many from childhood holidays at Minehead) is the smallest District in England in terms of budget and population.  This week the Council published an LGA report that showed that its unavoidable annual budget growth bill of £150,000 dwarfs the maximum it can raise by increasing Council Tax in line with the 2% cap, which is just shy of £40,000.   With grants shrinking this is an arithmetical bind from which there is no escape and all the Council can do, the report acknowledges, is seek to put off the day when it holds up its hands and tells the world it can no longer meet its statutory obligations.   

Birmingham, on the other hand, is England’s largest unitary authority, with a population about 30 times larger than West Somerset.   Its problem is that it has to set aside at least half a billion pounds – and probably more- to cover equal pay claims from some of its women workers, backdated for several years.  Arguably the scale of Birmingham’s operations have contributed to the extent it unwittingly breached the Equal Pay Act.   There is much more Birmingham can do to balance the books than West Somerset can, but unless it is allowed to capitalise current these liabilities , it will have to find considerable additional savings this year on top of those brought about through austerity. 

As readers will know,  Chubby Cat frowns upon public sector bodies putting off for tomorrow what it should really be paying for today (or yesterday), but in this case the effect on current service users of mistakes made in the past would be very unfair unless the cost is managed over a longer period.

Part of the problem, of course, is the local government finance system does not deal very well with authorities at the extremes,   It is difficult to devise a system that doesn’t result in outlier authorities ending up with either too little or too much.     When the pieces of the system are being thrown up into the air,  as they are at the moment, the risks for organisations multiply.  From next year, market factors will decide some of the distribution of funding between local authorities and the system will become less easy to manage.  

Only the week before last an elected Member expressed to me his concern that more than one local authority would go bust as a result of austerity,  I intend to return to this issue in the future,  in particular the question of what happens next if such an eventuality arises. 

In the meantime it is enough to note that perhaps at the moment it is best to be medium sized.