Local Government Finance

With permission, Madam Deputy Speaker, I wish to make a statement about local government finance in England. For the first time ever, this is a three-year settlement. I am today able to confirm for each authority for each of the next three years not only allocations of formula grant but allocations of the new working neighbourhoods fund and 60 other specific grants, from eight Government Departments. In total, Government revenue funding for local authority services will be, in the years 2008-09, 2009-10 and 2010-11, £70.4 billion, £73.5 billion and £76.7 billion. These are increases of 4 per cent., 4.4 per cent. and 4.3 per cent. respectively. This continues the sustained real-terms increases for local government under this Government. By the end of this comprehensive spending review period, local government will have received a real-terms grant increase of 45 per cent. since 1997. Formula grant, which includes revenue support grant, redistributed business rates and the police grant, will total in each year £27.5 billion, £28.2 billion and £29 billion, representing increases of 3.6 per cent., 2.8 per cent. and 2.6 per cent. respectively. Every authority will receive a formula grant increase in every year. In addition, we expect of local government the same 3 per cent. efficiency savings each year as the rest of the public sector. Delivering that would mean that councils would have an extra £4.9 billion over the spending review period, which they could use to improve services or to cut council tax pressures. We have worked closely with local government and its associations over the past two years to assess cost pressures and the scope for efficiencies. This settlement takes account in particular of the pressures on adult social care and on waste. Local government told us that it wanted certainty, flexibility, equity and stability in funding, all of which are delivered by this settlement. On certainty, we are providing a three-year settlement, not just for the core grant but for 61 other central Government grants and for regeneration funds. On flexibility, we have pooled 38 of the 61 specific grants into the new area-based grant, worth £4.7 billion by 2010, three quarters of which was previously ring-fenced but will be no longer. We are also transferring £900 million a year from other specific grants into formula grant. Local government also wanted less bureaucracy from central Government, so we have radically streamlined the new performance framework for local government, with a single set of under 200 national indicators, down from about 1,200. On equity, we consulted local government over the summer on making the method of grant distribution fairer. My conclusions are set out in the further consultation paper that we are publishing today, but let me highlight these points. Following a major review, we were able to introduce a new and improved formula in each of the areas of social care in 2006. For the past two years, we have been damping two of those formulae. I now propose to end the additional damping and fully to implement the social services formulae. The overall system of grant floors, which we will retain, will ensure that that unwinds quite gradually over this and the next spending review periods. I also propose to make the system fairer to authorities with a relatively low council tax base. Those authorities will have much greater difficulty than others in coping with spending pressures. I therefore propose to increase by 2 per cent. the proportion of the blocks for relative needs and relative resource within the available total. We have made significant progress with regeneration in many of the most disadvantaged areas of the country. The new £1.5 billion working neighbourhoods fund replaces the neighbourhood renewal fund and builds in the Department for Work and Pensions deprived areas fund to create a single fund at local level. As we set out in the sub-national review, we are concentrating that funding on tackling worklessness in the most deprived areas. Sixty-six local authorities will receive funding from the working neighbourhoods fund for three years, and the 21 authorities that currently receive neighbourhood renewal funding but do not qualify for the new fund will get two years of transitional funding. On stability, we consulted on aspects of the area cost adjustment. I propose some changes, to reflect more recent evidence, in the weights given to labour and business rates costs. However, I have decided not to implement any changes in the geography of the area cost adjustment. The consultation proposals covered only a few areas, and the financial turbulence involved did not seem justified by the relatively minor refinements that would result. I therefore intend to take advantage of the next three years to conduct a full review of the area cost adjustment, which will begin after the House has debated and approved this settlement. I also propose no change to the expenditure base of the formula for fire and rescue. I have concluded that the last few years have been an untypical period for the service, making spending patterns an uncertain base for a formula. Again, I propose to conduct a thorough review of the formula. That will begin in the new year. Grant floors damping is the main way in which we ensure stability of funding for councils over time. Though some argued for the opposite, we will continue with the system of floors, which ensure that every authority receives a formula grant increase in every year of the comprehensive spending review period. In setting floor levels, I have struck a balance between providing an increase for all authorities and allowing formula changes to come through. For each of the three years the floors will be: for fire and rescue authorities and shire district councils, 1 per cent., 0.5 per cent. and 0.5 per cent.; for authorities with responsibilities for education and social services, 2 per cent., 1.75 per cent. and 1.5 per cent.; and for police authorities, 2.5 per cent. in each year. To deliver this three-year settlement, we need to use the best and latest data available on a consistent basis across all authorities and we need to deploy it at the time we calculate the three-years figures. For population, those are the population projections produced by the Office for National Statistics in September, which take advantage of improvements in the way in which migrants are counted. The majority of the councils in our consultation wanted us to use those figures. In recent years, however, the UK has seen significant demographic changes, not least in the pattern of people's mobility. Those changes clearly create new measurement challenges. We are determined to build on recent improvements, while recognising that there is no single, simple or swift solution to those challenges. I can confirm today that the national statistician will now bring together central and local government to work on ways to improve population survey data and to make greater use of administrative data. Ten successive years of above-inflation grant increases from this Government—continued throughout this spending review period—plus tough capping action have helped bring down council tax increases. Keeping council tax under control remains a high priority for the Government. We expect the average council tax increase in England to be substantially below 5 per cent. next year. Let me be clear: we will not hesitate to use our capping powers as necessary to protect council tax payers from excessive increases. This is a tight settlement, but it is fair and affordable. It delivers the certainty, the flexibility, the equity and the stability that local government wanted. We know councils are capable of innovating, managing change and improving efficiency without having a disproportionate impact on their council tax payers. The challenge and onus now is on councils to demonstrate the leadership to deliver just that. I commend the statement to the House.