Examination of Witnesses

Local Government Finance Bill – in a Public Bill Committee at 9:29 am on 31st January 2017.

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Councillor Nick Forbes and Councillor Jon Collins gave evidence.

Good morning. We will now hear oral evidence from the Local Government Association and Core Cities. We have until 10.45 for this session. Will the witnesses please introduce themselves for the record?

Councillor Nick Forbes:

Good morning. I am Councillor Nick Forbes, leader of Newcastle City Council. I am also vice-chair of the Local Government Association.

Councillor Jon Collins:

I am Jon Collins. I am the leader of Nottingham City Council and vice-chair of Core Cities.

Thank you very much. There are no introductory remarks; we will just ask questions. I call Gareth Thomas.

Photo of Gareth Thomas Gareth Thomas Party Chair, Co-operative Party, Shadow Minister (Communities and Local Government)

Q Two of the concerns about the Bill that have been raised with me relate to how redistribution might work—fairly or unfairly—when 100% of business rates are retained by local government, and whether responsibilities such as social care will be better funded under the new system than they are under the current system. I wonder whether you both might reflect on those two concerns.

Councillor Nick Forbes:

The issue with redistribution is of concern to everyone across local government, because although collectively we sign up to the principle of localisation of business rates, we are concerned that the redistribution mechanism must be seen as fair by everyone. It would seem sensible to start with an assessment of current needs so that there is at least a level of clarity around the existing requirements to fund services in the system. One of the things that people say across the whole range of local government is that over time, because of the way that formulas have worked and settlements have been made, there has been a distancing of assessed need from funding. It would seem sensible to start with a baseline assessment.

On the point about whether social care would be better funded through this system, one of the challenges is getting right a system that is based entirely on local property taxes, but where eligibility for social care is determined through national criteria. There is a potential for the funding system not to accurately match needs, which is why, again, having some kind of national assessment of baseline needs would be a good place to start as we work through the detail of how that would operate.

Councillor Jon Collins:

In terms of the effectiveness of redistribution of business rates as a way of funding local government, as Nick says that is very much going to rest on the redistribution formula on the one hand, but also on the way that the headroom generated by 100% business-rate retention is dealt with and the additional responsibilities that local government may or may not get to spend that effectively. Until we are clear about those two things, it is very difficult to make a judgment on whether the move to 100% business-rate retention is going to be fair and whether it will effectively better fund care. The nature of the funding formula, whether it relates to care or to the totality of how local government funding is passed through to local authorities, is very much the key.

If you look at how the additional funding for care at the moment has been distributed, we have two lots of clear criteria and one set of criteria that nobody can find out about. In terms of the improved better care fund, the criteria take into account the ability of local authorities to generate funding locally. The social care grant, which is £240 million, is allocated on a different formula, which does not take account of the ability to raise funding locally. Then there is transitional funding, which is in part a reflection of the additional costs of providing care, and nobody knows what the formula for distributing that is because it has not been disclosed to Parliament or to the Information Commissioner.

Photo of Gareth Thomas Gareth Thomas Party Chair, Co-operative Party, Shadow Minister (Communities and Local Government)

Q To follow on from that, there are clearly some in Whitehall who think that social care is now being properly funded and there is a package in place that will meet all the social care needs that have been identified. How would your two organisations respond to the idea that there is now a settled funding stream in place?

Councillor Nick Forbes:

I do not know a single person in DCLG and I have not spoken to a single person in Whitehall who thinks that what we have for social care is anything other than a short-term temporary fix, which gets us through a few difficult months over this particular winter. There is clear acknowledgement—even the Secretary of State acknowledged this in the settlement—that there needs to be a longer-term solution for funding for social care. The LGA’s assessment is that there is a £2.6 billion shortfall in funding: £1.3 billion is required to stabilise the current system as it is at the moment and a further £1.3 billion is required by the end of the Parliament to deal with the cost pressures and demographic pressures that the system faces. It is very clear from the whole of local government—this is a cross-party view from within the LGA—that funding the social care problem is our top priority. So far, what we have had is something that gets us a few months further ahead but does not solve the problem into the long term.

Councillor Jon Collins:

From the Core Cities’ point of view, every core city would take the view that funding for social care is very much in crisis and that the current arrangements just scratch the surface. If I may, I will just give you Nottingham as an example. Out of a net budget of about £260-odd million, something like £90 million is adult care. We have £11.2 million-worth of cost pressures, and that is wages, demography, additional inflation and charges from providers. The potential increase to council tax of 3% and the extra care funding we are to receive is about £5.8 million. So £5.6 million is unfunded pressures, which we will have to accommodate by making savings elsewhere in our budget, at a time when we are also seeing our revenue support grant going down from £56 million to £44 million. As you can see, the overall picture for an authority such as Nottingham—we are very typical of the core cities—is that this year’s approach helps a little bit, but that there is still massive pressure that is unfunded, and we expect the same next year. That is with an assumption that we will be increasing council tax by 5% overall.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

Q You have both mentioned that distribution, and assessment of need, are the keys to this. Your spending power for both your authorities is around 30% lower than some of the highest spending authorities in London, for example. Is the current system anywhere near fair?

Councillor Jon Collins:

In a word, no. Spending power is an interesting way of looking at these things, but our spending power now, as a core city with major challenges in terms of deprivation, is lower than that of Rutland, which is another local authority in the east Midlands and largely covers a lake, a few sheep and a few large houses. It is a very unfair way of making judgments about relative impact of spending. Even for the next financial year, we are seeing a reduction in spending power of 1.5% and Rutland is seeing a reduction of 0.6%. So there are major disparities—that is, if one assumes that spending power is a fair reflection of the spending needs of local authorities.

Four years ago, our revenue support grant was £126 million; next year it will be £44 million. That is the scale of funding reduction we are being faced with. We have had to make significant reductions in services in some areas. We have done other things, as most core cities have, to boost income, reconfigure services and work closely with others to make sure that we are commissioning in the most cost-effective and efficient way, which is a positive. Fundamentally, however, there has been a significant and dramatic effect on services.

Councillor Nick Forbes:

One of the challenges is the currency that you use to describe the nature of the problem. It is easy to say that we have an unfair system if you look simply at a per capita rating—and that is one of the ways in which people compare different types of authorities. Spending power is another currency, and so is needs requirement. What there is not, across the system, is a settled view about which of those is the most appropriate to use. Inevitably, that gets you into the realm of which one is better for which political outcome. That is one of the reasons there is concern about the way in which the business rates system works at the moment.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

Q In the current system, are you confident—which I suppose should be the case—that spending power per capita, or the total, or whatever, relates to need in that local authority area? Are you confident that that system works at the moment?

Councillor Nick Forbes:

No, it does not.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

Q And are you part of the technical working group on the LGA that is looking at this review of how distribution occurs?

Councillor Nick Forbes:

I am not a member of it, no—but there is a technical group within the LGA.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

Q Do you understand how the system works in terms of how it is distributed between different local authorities?

Councillor Nick Forbes:

Does anyone know how the formula works? The other thing is that, in addition to the system being potentially unfair, it is also very inflexible. One of the challenges that every local authority faces is a system which, in effect, is set nationally and gives us no opportunity to vary things according to local circumstances. One of the things we are asking for within the LGA, as part of the Bill’s consideration, is flexibility for local government to be able to make changes—for example, if it has a sector that it wants to strengthen, or even if it has an area of deprivation where it wants to stimulate economic growth. As long as we can do that in a fiscally responsible way, it seems entirely sensible to allow local authorities to have those flexibilities, which currently we do not have, other than through the relief system.

Councillor Jon Collins:

The formula is very complex. Relatively small changes to weightings can have a big impact in terms of the funding that local authorities get over time. The weightings have been changed very much away from need and deprivation towards per capita and sparsity. Of course, that then benefits counties and largely rural areas at the expense of large cities. That is why we can see a dramatic shift of resources to relatively well-off authorities in the south-east. Transition grant is another example: here is a £300 million pot of money to be spent over two years, none of it has gone to the core cities, 80% of it has gone to Conservative authorities, it has all gone to county councils, and there is no accountability over the formula by which it has been allocated. That is part of the funding package but while there is a little more clarity about how the criteria are applied elsewhere within the funding formula, the combination of the complexity and the lack of direct accountability for how the formula and the criteria impact on the funding for particular categories of authorities is problematic.

I remind Mr Hollinrake that I have five other hon. Members who wish to speak.

Thank you. I know you wanted to ask another question, but in order that we can get everybody in in our limited time, can we please have short questions and shorter answers? You do not both need to answer if one agrees with the other.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Q The Government, and indeed the Minister, have been very clear that one reason for the Bill is to strengthen incentives for councils to grow their business rates income. The Minster also said that while we all wish to encourage business growth, that is not happening everywhere. He said that this morning about the actions of councils. Is the Local Government Association aware of any council in England that is not trying hard to encourage business growth, and with it business rates growth, or is not trying hard to encourage business overall?

Councillor Nick Forbes:

The short answer is no; local government knows that by 2020, when this new system comes into effect, we will be entirely reliant on two property taxes—council tax and business rates—for the totality of our income other than that which we generate commercially, so every authority understands that it is in their best interests to grow both of those tax bases as quickly as possible. I am certainly not aware, and I do not believe the LGA is aware, of any authority that does not see that as an important priority.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Q Just to be clear, the Minister has not actually produced any evidence for those assertions. He may do so later, but he did not get any such evidence from the LGA because you are not aware of any such evidence.

Councillor Nick Forbes:

I am not aware of any, no.

Photo of Justin Tomlinson Justin Tomlinson Conservative, North Swindon

Q Following on from that, the whole point of the Bill is to unlock potential, to incentivise and encourage you. You have identified where those potential streams will come from, but ultimately it will only be as good as your capacity to deliver it. Are you confident that councillors have the sufficient skills base to be able to maximise it? You have just said that you do not think that any local authority is not encouraging growth, but—this is a good example—many local authorities have still not signed off their plan for the new homes bonus or are still fighting development. That is often for good reasons, but they are fighting it. Are you confident that councillors in all local authorities have sufficient capacity to take advantage of these potentially much larger budgets and incentives, which need to be chased down?

Councillor Nick Forbes:

Actually, it strengthens the concept of accountability if you have a direct link between taxes raised locally and how those taxes are determined in terms of their spend at a local level. I would argue a slight counter-view to yours, which is that by doing this it is very clear where the incentives are within the system and it is then incumbent on anybody occupying elected office at a local government level to make sure that they have those finances and plans in place, because otherwise they will see a direct link between that and a reduction in funding for their area. So I think it acts as an incentive for that. As for capacity for handling it, I think that local government is, on the whole, very confident that it can handle this. Upper-tier authorities handle funding of more than this magnitude already.

Photo of Justin Tomlinson Justin Tomlinson Conservative, North Swindon

Q So are you confident that these changes will help encourage busy people—people with business experience—to step up to help run councils, as opposed to career politicians who wish to tweet all day about various political causes? I say that as someone who was a councillor for 10 years. What we need, when we are being given big budgets, is a mix of councillors from all backgrounds. Do you think that this will provide an incentive to get some really good new councillors who do not have a career-politician background?

Councillor Nick Forbes:

I am not sure I recognise your characterisation of local councillors.

Photo of Justin Tomlinson Justin Tomlinson Conservative, North Swindon

Q No, there are fantastic councillors, but we all recognise that, as things stand today, it is very difficult to encourage busy people to give up their time. We will be asking even more of them as councillors, because they will have more responsibility and more complex decisions to make. Are you confident that this will help encourage them, or will it put people off stepping forward?

Councillor Nick Forbes:

My view is that there is already a very high calibre of politician in local government, across all political parties. The leadership that people have shown over the past few years, in terms of responding to the challenges that have been thrown at them, has been absolutely magnificent. Collectively, local government is up for this and wants to do it. I would not come here on behalf of the LGA, which is a cross-party organisation, and say that we want these things to be included in the Bill, if I did not have the confidence that we were capable of delivering.

I am conscious that we have very little time and I want to get other people in.

Photo of Jim McMahon Jim McMahon Shadow Minister (Communities and Local Government) (Devolution)

Q The Independent Commission on Local Government Finance recommended that an independent body be established to look at redistribution, to make sure that it was fair and equitable and to take it out of the hands of Ministers being able to manipulate the funding settlement for different reasons. Is that something that the LGA still supports?

Councillor Nick Forbes:

The LGA does not have a clear corporate view on that at the moment. What the LGA is doing is trying to get to a position where we have as much agreement as possible about the way in which the new system should operate.

My own view is that there will need to be a level of independent assessment because, inevitably, given the way in which local government works, there is a danger that there will be winners and losers. It would be politically unacceptable for the LGA to pick winners and losers as part of the solution.

We have a body to determine public health funding and it is a quasi-independent body. It looks at need and allocation based on need. My personal preference would be for something akin to that for local government finance, so that there is a body jointly commissioned on behalf of Government and local government that comes up with a distribution that has clear and transparent criteria behind it.

Councillor Jon Collins:

I think Core Cities would support an independent approach to redistribution. The current system, when you look at the way in which funding has shifted away from the core cities over the last seven to eight years, is clearly unfair and is not related to need. Our view would be that an independent approach to the allocation of resources would be very welcome.

Photo of Jim McMahon Jim McMahon Shadow Minister (Communities and Local Government) (Devolution)

Q The risk of appeal is obviously accommodated for in the item that we are discussing. Many local authorities have to ring-fence a significant amount of money in reserves, pending large appeals—large warehouses and supermarkets in particular can have a big impact on local funding. Do you think that there should be a tighter or shorter period in which those appealing can reclaim money due?

Councillor Jon Collins:

The answer is yes. This is a major destabiliser in the whole funding approach. As we become increasingly dependent on the business rate, local authorities will have to make increasingly significant allocations of funding into reserves to hedge against the possibility of losing some very significant appeals. For example, the total now held by local government is estimated to be about £2.5 billion against losing business rate revaluations. Nottingham itself has lost about £20 million as a result of those kind of revaluations. That adds significant instability to the funding mix. What it means is that, effectively, it exacerbates our challenges and the funding reductions that we are having to make elsewhere in budget. This is something Government could make a significant difference on and they could provide greater certainty for local authority funding.

Councillor Nick Forbes:

The Government’s own assessment is that the level of appeals will go down in future years. All the evidence from previous revaluations shows that when there is a revaluation, the number of appeals goes up. Of course, that increases the risk for local authorities, which is why, as John says, £2.5 billion over the past five years has been earmarked by local government to deal with the risk of managing the appeals process.

One of the challenges is that there is no disincentive to appeal. There is nothing to stop anybody putting in an appeal. If you make a claim to an employment tribunal, you have to pay an upfront fee. Some kind of disincentive like that would be worth considering to make sure that we do not get speculative appeals from people who have no fear of any consequence of making an appeal, which simply drags the system out and causes a lot of administrative burdens.

Photo of Jim McMahon Jim McMahon Shadow Minister (Communities and Local Government) (Devolution)

Q Finally, the Minister does not believe that there is a crisis in adult social care. Do the LGA and Core Cities agree with that view?

Councillor Nick Forbes:

The LGA position, as a cross-party organisation, is very clear that there is a crisis in adult social care. The changes made in the settlement, with the adult social care grant and the ability to raise additional money through the council tax precept, are a sticking-plaster approach. There is cross-party agreement that this is the biggest single challenge that we face as a sector. We are collectively asking the Government to use the Budget on 8 March as a way to find a longer-term solution to the problem.

Councillor Jon Collins:

My answer earlier was clear that we believe that there is a crisis.

Photo of Kevin Foster Kevin Foster Conservative, Torbay

Q I have listened to the answers so far and will not go back over old ground. However, I am interested to hear more about the difference the Bill will make. There is no point in legislating for the fun of it. What actual difference will it make? Apart from the obvious use of the provision for discretionary relief for public toilets, what aspect of the Bill do you see your councils looking to use for the benefit of local residents?

Councillor Nick Forbes:

Local government is asking for a number of things. One is the need to increase accountability and visibility with regard to the general principle of connecting taxes raised with money spent in a local area. More specifically, local government is asking for flexibility on the use of business rates. At the moment, the multiplier can only be determined at an authority-wide level and there is no way of targeting growth to allow us to discount specific businesses or industries. Giving us those discretions would allow us to consolidate where we have sectoral strengths in how the enterprise zone system works, but currently at a very small scale.

You could see local authorities using this to drive growth, create jobs and deal with areas where you might have a neighbourhood shopping centre that is difficult to let because of the rates. At the moment, we have no ability to discount rates. That is the kind of thing we could make a real difference around. For me, the big prize is the flexibility that the system would give to allow us to be much more responsive to local need.

Councillor Jon Collins:

It has the potential to provide real incentives to local authorities to focus attention on building business rate growth. I will caveat that by saying that, ultimately, whether it is effective will depend on the distribution formula and whether there is an assumption that any headroom generated by 100% collection and use of business rates is simply centrally earmarked against some additional expenditure or there is a little flexibility so that we can invest for that business growth.

Ultimately, local authorities, certainly Core Cities, are very clear about the importance of working closely with business and promoting development as a way of generating additional business rate growth. Obviously, in doing that we are enhancing and developing our cities in the way that we know our population wants to be developed.

We have time for one more question.

Photo of Gareth Thomas Gareth Thomas Party Chair, Co-operative Party, Shadow Minister (Communities and Local Government)

Q Is it fair that, under the Bill, only areas with a mayor are going to be allowed to raise business rates up to a cap of 2p in the pound?

Councillor Nick Forbes:

The LGA position is that we would welcome a conversation with the Government about how we can get maximum flexibility out of the system. The challenge is that areas that do not opt for an elected mayor will, by default, lose out in terms of infrastructure investment. It would make sense for there to be some kind of system from which, through various routes, everybody feels that they can benefit.

Councillor Jon Collins:

If devolution was an option for everybody, if there was a fair and transparent process for making bids for devolution deals, if there was a very clear understanding of the rules of the game, and if people chose not to go down that route, I think there would be an argument for making that differentiation. In the current climate, in which much of that is opaque and where there are no clear rules of engagement around devolution and the prospect of moving towards combined authorities and directly elected mayors, it would seem very unfair.

I am afraid that that brings us to the end of the allocated time for the Committee to ask questions. On behalf of the Committee, I thank our witnesses for your evidence.