I believe that our gloriously diverse country will prosper more if the districts, counties, towns and cities that make it up have more power. If we accept that, it follows that we must believe councils to be capable of exercising that power.
Over the past five years, councils have shown great responsibility. Given that local authorities account for a quarter of public spending, it was always going to be the case that they would have to carry their share of the burden of reducing the largest deficit in peacetime history. Not only have they done so, but public satisfaction with their services has been maintained or has improved. I especially want to thank the staff of councils most deeply involved with the recent floods: their commitment to their residents is exemplary. However, I cannot credit councils with acumen and then deny them candour. More savings need to be made as we finish the job of eliminating the remaining deficit.
I listened carefully to councils as I prepared this settlement. Councils asked for the right to spend locally what they raise locally; for help with adult social care costs; for expenditure savings that recognise what has already been achieved by local government; for recognition of the higher costs of providing services to sparsely populated rural areas; for encouragement for cost-saving innovation; for rewards for new homes; for complete transparency with regard to resource allocation; and for a move beyond one-year-at-a-time budgeting. As I will explain, this provisional settlement meets all those objectives.
Local government will be transformed by localism. In 2010, councils were 80%-dependent on central Government grants. By 2020, they will be 100%-funded by council tax, business rates and other local revenues. The retention of 100% of business rates will forge the necessary link between local business success and local civic success. To support that further, we will increase the local growth fund to £12 billion by 2021. This is a Conservative-led revolution, transforming over-centralised Britain into one of the most decentralised countries in the world. Authorities will also be able to spend 100% of capital receipts from asset sales to fund cost-saving reforms. We will publish guidance for local authorities on that matter.
The spending review set out that, based on the forecasts of the Office for Budget Responsibility, overall local government spending would be slightly higher in 2019-20 than in 2015-16. In this settlement, the core spending power for councils will also remain virtually unchanged at £44.5 billion in 2015-16 and £44.3 billion in 2019-20. In real terms, that requires savings of about 6.7% over the spending review period, compared with the 14% required at the beginning of the spending review period in 2010.
The unanimous view across local government is that the biggest cost pressure is care for our growing elderly population. In September, the county councils and the Local Government Association wrote to me, estimating that those costs would require an additional £2.9 billion by 2019-20. Some local government leaders proposed an innovation: a social care council tax precept of 2% a year, guaranteed to be spent on social care. That is equivalent to £23 per year on an average band D home. In the spending review, the Chancellor and I agreed, and we will ensure that the precept is transparently itemised on residents’ bills.
However, we will go further. We know that for some councils, the precept will not raise enough to meet the growing costs, so we have announced a fund of £1.5 billion a year to support councils in working with their local NHS to address the pressures on care. Today, I allocate that £1.5 billion to complement the new precept, so that more goes to councils that raise least from the precept. We recognise in the distribution of resources the particular needs of councils with social care responsibilities.
Local government has asked for £2.9 billion by 2020 as a contribution to the costs of social care. In this settlement, we make up to £3.5 billion available by that year, distributed fairly towards local authorities with social care responsibilities. I applaud the maturity of local government as a whole in telling me that it accepts that this prioritisation implies that, over the next few years, those councils with social care responsibilities should have relatively more resources than those councils which do not have them. Some district councils—those with low council tax bases or those which serve the most rural areas—face particular pressures, so while this settlement maintains the core referendum threshold at 2%, the threshold for the lowest cost district councils will be £5 a year, so that they are not punished for being economical while those who have spent more in the past are allowed to spend more now.
I will increase support for the most sparsely populated rural areas by more than quadrupling the rural services delivery grant from £15.5 million this year to £65 million in 2019-2020, by which time, when 100% business rate retention has been achieved, we will be able to consider what further correction is due. I will also protect, in real terms, the £30 million funding for lead local flood authorities, and the £2 million for those authorities to act as statutory consultees in planning sustainable drainage systems.
The new homes bonus provides valuable funding and, as importantly, encourages house building. I can announce today that I will extend the new homes bonus indefinitely, but with some changes on which I am consulting. All savings will be retained by local government to contribute towards social care.
In a world in which only a small proportion of councils’ funding will come from central Government grant, we require transparency on the components of the financial resources available to councils. I have noted the criticism from the Public Accounts Committee and the Communities and Local Government Committee of previous inclusions of the existing better care fund and the public health grant in councils’ spending power. I will follow their advice and, henceforth, report only resources over which councils have discretion.
In addition, in all the figures in the settlement, I have chosen to understate the maximum resources available to councils. For example, in line with the OBR, I assume that councils will increase council tax in line with inflation, rather than the referendum threshold of 2%. I expect that, as previously, councils will increase bills by less than their full entitlement. Had I assumed the maximum figure, more than a quarter of a billion pounds extra in total resources would have been recorded as being available to councils.
The main reason councils keep liquid reserves is as a buffer against unpredictable year-to-year budgets. Local government has consistently told me, and for generations told my predecessors, that greater certainty about their income over the medium term would allow local authorities to organise more efficiently and strategically, and to put some of those safety-net reserves to more productive use.
Therefore, in this settlement, I do something that local leaders have yearned for. For the first time ever, I offer a guaranteed budget to every council that desires one and can demonstrate efficiency savings, for next year, and every year of this Parliament—a four-year budget to give certainty and confidence. It is a settlement that maintains the financial resources available to councils in 2020 at around the same level as they are today, while giving incentives for local government to make significant savings, and it directs up to £3.5 billion to care for our elderly citizens. This historic settlement does what campaigners for devolution thought they would never live to see: local councils answerable to local people, rather than to central Government, and I commend it to the House.