Contact: Jon Pittam, ext 7400

1. Summary

1.1 The Government has published a draft Bill to give effect to all the proposals (mainly financial) in the Local Government White Paper that require legislation. Comments are required by 23 August 2002.

1.2 The following decision is sought:

· That the County Council submits representations to the Government on the issues raised in the accompanying report, together with any comments the Cabinet wishes to make following discussion at its meeting

· That copies of the report be sent to Hampshire MPs

· That appropriate action is taken through the County Councils Network, Local Government Association and directly by the County Council during the Bill's passage through both the Commons and the Lords.

2. Reason

2.1 The County Council needs to influence and safeguard its interests as the result of this proposed legislation.

3. Other options considered and rejected

3.1 Not applicable.

4. Conflicts of interest declared by the decision maker or a member or officer consulted

4.1 Not applicable.

5. Dispensation granted by the Standards Committee

5.1 Not applicable.

6. Reason for the matter being dealt with if urgent

6.1 Not applicable.

Approved by: Date:

Councillor T K Thornber

Contact: Jon Pittam, ext 7400

1. Introduction

1.1 The Government published in December 2001 the White Paper "Strong Local Leadership - Quality Public Services" and subsequently set out an implementation plan for completion of White Paper commitments. Many of these commitments require primary legislation and the Government intends to introduce a Local Government Bill as soon as Parliamentary time allows.

1.2 A draft Bill has been published for consultation and comments are required by 23 August 2002. Many of the commitments involve local government finance. The key measures set out in the draft Bill include:

· provision to abolish credit approvals and replace them with a new prudential capital finance system

· new duties on local authorities in relation to financial management

· introduction of formula grant, and the merging of revenue support grant (RSG) and non-domestic rates

· establishment of business improvement districts

· changes to non-domestic rates, including rate relief for small businesses

· introduction of a statutory revaluation cycle for the council tax, and various changes to the operation of the council tax

· changes to housing finance

· new powers to charge for discretionary services and to trade

· new powers for the Secretary of State to remove controls on authorities depending on their performance classification

· proposals on local polls

· voting rights for co-opted members on scrutiny committees.

1.3 A summary of the detailed technical content of the Bill is attached as Appendix 1.

1.4 The Leader of the Council as Vice Chairman of the County Councils Network (CCN) has given evidence on the draft Bill to the Urban Affairs Sub-Committee of the Transport, Local Government and the Regions Select Committee inquiry into the draft Bill. The County Treasurer has submitted written evidence as lead financial adviser to the CCN.

1.5 This report summarises the main proposals in the Bill and illustrates the issues raised. It is recommended that the County Council makes a formal response to the draft Bill, possibly in the form of a signed letter from all three political group leaders. Subject to any further views, the Cabinet may have at this meeting, the County Treasurer will prepare a draft response to meet the deadline of 23 August 2002.

2. Summary

2.1 The Minister for Local Government, Nick Raynsford, speaking at the Cipfa Conference on 12 June 2002 said that he wanted to see local government rather than local administration and that "unnecessary controls and regulations will be replaced by a better targeted approach recognising good performance and encouraging improvement".

2.2 However there has been relatively little movement on the freedom and flexibility elements of the White Paper. There are a few significant deregulatory measures on

· capital finance

· powers to trade and to charge.

2.3 No progress has been made on more radical moves on finance, with the return of business rates to local control excluded, and no progress on the promised review of the balance of funding (to enable local authorities both to have more local income and greater control over it).

2.4 The proposals on rate relief for small businesses and changes in council tax can be welcomed, but the provisions for additional financial management are unwelcome and unnecessary, particularly in the light of the Minister's comments in para 2.1.

2.5 Strong objections need to be raised against the proposal to merge the revenue support grant (RSG) and national non-domestic rates (NNDR - or business rates), as it does not add to transparency and destroys the link with local business rates.

2.6 The Bill does not address the fundamental issue of local government finance with the Government retaining too much control over local authority income.

2.7 The overall feel is of more detailed Government intervention and controls, with further reserve power to the Secretary of State, rather than sweeping away "unnecessary controls and regulations".

3. Capital finance - main proposals

3.1 The draft Bill sets out a new framework for local authority capital finance. The existing system of capital controls will be repealed, together with the many complex regulations supporting it.

3.2 The Bill widens existing powers to borrow to cover borrowing for treasury management. It establishes that the main borrowing control will be the duty not to breach the prudential limits or any national limit.

3.3 The key change is a new freedom for local authorities to borrow to finance capital expenditure where they can afford it, without government approval. Although there are provisions for a reserve power to set limits on borrowing and credit "it is envisaged that these would be used only in exceptional circumstances".

3.4 The draft Bill proposes that the new finance system applies to credit arrangements, and sets out the definition and use of capital receipts. The Secretary of State is given powers to regulate the use of capital receipts, though the intention is that capital receipts will, as now, be used normally for new capital spending.

3.5 The draft Bill also clarifies that councils have the power to invest, not only for purposes relevant to their functions but also for the prudential management of their financial affairs. It sets out a framework for identifying the accounting codes that constitute "proper practices", so that as far as possible the standard local authority accounting practices and concepts are used.

4. Capital finance - issues raised

4.1 These proposals are generally welcome and will give the Council the financial freedom to borrow what it can afford. It will enable local authorities to finance investment priorities which the current capital system has not adequately resourced or facilitated, such as "invest to save" schemes. It might in principle result in a small increase in capital investment, to the extent that authorities can afford (and choose to incur) the revenue consequence.

4.2 But the whole cost of such borrowing will fall on the council tax. Experience with the introduction of the single capital pot suggested that new freedoms, even for authorities such as this Council, which submitted the highest classification of capital strategy, are non-existent. The return of the discretionary element did not provide any additional funds compared with previous borrowing limits. It has yet to be seen how the single capital pot and Government supported borrowing or capital grant will develop, but it is unlikely that there will be a significant increase in overall capacity to invest on capital assets, especially if the Council loses substantial amounts of revenue formula grant over the same period.

4.3 It is not clear when these proposals will come into effect, possibly not until1 April 2004.

4.4 The proposals will require the development and adoption of the Cipfa prudential code for capital finance.

4.5 The wide powers allowing the Secretary of State to make new regulations and orders are unnecessary. Reserve powers to set borrowing limits for all or individual authorities are unnecessary given the principle of a prudential system for capital finance. They will also bring an element of uncertainty to the process when local authorities set borrowing limits. The proposals relating to the treatment of credit arrangements are unnecessarily complicated and divorced from accounting practices.

4.6 There will be a reserve power to regulate the use of capital receipts and to require that local authority capital receipts be paid to the Government to be redistributed to other authorities. The Council should object strongly to any extension of the pooling of capital receipts except for housing capital receipts, which was the intention in the White Paper. There would be no incentive for efficient and effective use of assets and Hampshire would be doubly penalised by redistribution of capital receipts as well as revenue resources through formula grant, whilst incurring higher land values and building costs for new investment which is not similarly recognised in Government borrowing support.

4.7 The clarification of power to invest for prudent financial management purposes are a helpful step but the Government could also be encouraged to provide additional flexibility on financial instruments which can be used for investment purposes.

5. Financial administration - main proposals

5.1 These proposals include

· power for the Secretary of State to determine a minimum reserve level for local authorities by regulation. The Local Government White Paper indicated that the Government's preference was to keep this power in reserve

· a requirement on chief finance officers to report on the adequacy of reserves and robustness of budget estimates as part of authorities' annual budget setting processes. Regulations are likely to specify that they have regard to a Cipfa code issued for this purpose

· local authorities to be given a statutory duty to monitor their budget and take action in the case of overspends and shortfalls of income

· the easing of provisions preventing local authorities from entering into agreements following a section 114 report which a chief finance officer must produce if the local authority is overspending. Members must then meet within a certain period to take measures to deal with this overspending. Chief finance officers will be given powers to allow agreements to go ahead in the period between the report and the meeting if in their opinion they will deal with the situation that led to the report being issued or prevent it happening again.

6. Financial administration - issues raised

6.1 Apart from the easing of the section 114 regime (highly unlikely to be required in Hampshire anyway), these provisions are all unnecessary. There is no need for new statutory powers to specify the level of local authorities' reserves or to monitor budgets. These proposals seem to be completely divorced from the audit, inspection and assessment of such issues through the Comprehensive Performance Assessment - further double jeopardy.

6.2 The proposals involve more regulation, not less, in a Bill which is supposed to achieve the removal of unnecessary controls and regulations. The Bill runs the risk of more intervention by the Secretary of State.

6.3 There is no convincing evidence that these proposals are necessary. In the rare event of some authorities which have been in financial difficulties, a minimum level of reserves would probably not deal with the root cause of those difficulties.

6.4 The proposals for the Secretary of State to specify that local authorities maintain their reserves at a minimum level would seem to be particularly problematic. Local authorities will have regard to a range of considerations when setting appropriate levels of reserves and it also seems unlikely that any legislation could account for all local authority types and sizes, or the changing circumstances and external factors affecting budget decisions within each authority from year to year. The budgeted increase in this Council's balances to meet external pressures and liabilities anticipated during 2002/03 are a good example. This Council's prudent level of balances is 0.6% of its budget - national prescription is likely to increase this and tie-up council taxpayers' resources unnecessarily. It is just as important to have adequate and appropriate budgets and tight financial control in the first place rather than rely solely on reserves.

6.5 Proposals for authorities to keep their finances under review, and for the chief finance officer to report on the adequacy of reserves and robustness of budget estimates are covered already in accordance with professional guidance, Cipfa codes and best practice, and there appears to be a distinct lack of evidence to support the need for such legislation.

7. Formula grant - main proposals

7.1 The proposals on formula grant will mean that:

· authorities receive a single grant, formula grant, instead of separate Revenue Support Grant (RSG) and National Non-Domestic Rate (NNDR) amounts

· the Secretary of State will set down in the Local Government Finance Report annually the basis on which formula grant will be distributed to local authorities (this is currently the system of Standard Spending Assessments; formula grant will be introduced in 2003/04). The Local Government Finance Report will be approved annually by Parliament, as at present

· the amount of non-domestic rates to be distributed to authorities (known as the "distributable amount") will still be identified at a national level, even though at authority level it will be consolidated with RSG into a single formula grant payment.

8. Formula grant - main issues

8.1 This needs to be strongly opposed:

· it does not add to transparency

· separate identification of NNDR is important to maintain the links with local business rates and for local budget consultation with business ratepayers

· a number of shire districts - including Fareham and Hart will start to lose as they currently do not receive any RSG

· the return of business rates to local control is the simplest and most effective way of increasing local authorities control over their own income and addressing the balance of funding concerns. This proposal will destroy that possibility

· it is also evident that council tax and business rates have supported the Government's increased spending plans, without the Government having to increase its share from central taxation via RSG. (Government support has been targeted towards the increase in specific grants from 4% in 1997/98 to 12% of total spending by 2002/03.) From 1997/98 to 2002/03 the overall changes in Government grant and council tax for the County Council can be summarised as below:

Government grant		County Council
RSG	NNDR	Budget	Council tax
%	%	%	%
-4.2	54.4	37.0	69.4

9. Business improvement districts - main proposals

9.1 The Bill sets out proposals for Business Improvement Districts (BIDS). BIDS will mean that local councils and businesses will work together to put in place local projects to improve their area. BIDS will be funded by a levy raised through an addition to the business rate, which local businesses will agree.

10. Business improvement districts - main issues

10.1 This will not affect the County Council but the Government should be asked to ensure district councils fully consult their county councils through local strategic partnerships and community planning.

10.2 There is some doubt about the extent to which local businesses will wish to support additional levies.

10.3 There is a potential contradiction between the introduction of BIDS yet at the same time removing NNDR with the introduction of formula grant.

11. Non-domestic rates

11.1 The Bill contains various provisions, most important of which is rate relief for small businesses (with rateable values under £8,000).

12. Council tax - main proposals

12.1 The proposals on council tax cover various changes to the system, including:

· the introduction of a statutory 10-year cycle for revaluing domestic properties for the council tax, with new valuations being used for the council tax from April 2007. Thereafter, new valuations will have to be undertaken at least every 10 years

· power to the Secretary of State to vary the number of council tax bands from the current eight

· as any revaluation is likely to affect the council tax bills individual households must pay, the draft Bill proposes that the Secretary of State phases in changes to council tax bills following a revaluation

· a set of minor changes to the rules on enforcing council tax collection

· changes to the basis of funding for combined fire authorities from levying to major precepting authorities, and

· finally, the repeal of the statutory basis of the council tax benefit subsidy limitation scheme.

13. Council tax - main issues

13.1 These proposals can generally be welcomed.

13.2 The success and stability of council tax depends upon it being seen as a fair tax. The disproportionate council tax increases relative to inflation to fund the Government's spending plans and the Council's local demands and pressures will put council taxpayers under an increasing burden. That will be exacerbated for Hampshire if the Government's options for changing formula grant come into effect.

13.3 At the very least council tax must be kept up-to-date. There have been considerable changes in relative property values since 1991 when the existing council tax bands were set, so a new revaluation to take effect in 2007 and regular revaluations thereafter can be supported. But this will lead to some significant regional variations (higher increases in the south of the country) and transitional arrangements for council tax payers will be needed. The effect on local councils, through the resource equalisation options in the formula grant review will also need to be carefully explored and could be very detrimental to this Council.

13.4 In order to improve the fairness of the council tax and enhance its long-term stability, the number of council tax bands and the ratios between them need to be reviewed and the Council can support and help influence the power of the Secretary of State to vary the number of bands.

13.5 The Council can also welcome the abolition of the legal basis of the council tax benefit subsidy limitation scheme - under which local council tax payers had to meet the additional costs in benefits of council tax rises above a certain threshold.

13.6 No date is given for the introduction of precepting powers for combined fire authorities. 1 April 2005 might be the earliest this comes into effect for Hampshire Fire and Rescue Authority. As indicated when the White Paper was published, this may well increase accountability and visibility of budget and council tax decisions but it would also mean more reserves and balances being held and a further fragmentation of local government. There will also be some areas of the country where the fire service remains part of county councils which were not affected by local government reorganisation. This will add to confusion and may cause some difficulties in implementation. There are also issues relating to the application of power without responsibility unless members of the combined fire authorities are directly elected rather than nominated by constituent authorities. When last discussed this Council was unable to come to a consensus of agreement on this issue.

13.7 The Council may wish to encourage the Government to adopt specific clauses to give local authorities discretion to remove the council tax discount for second homes and to retain the proceeds for local use, provided that district councils are required to consult with county councils as part of the decision-making process.

14. Housing finance

14.1 This is not of relevance to the County Council.

15. Powers to charge and trade - main proposals

15.1 The Bill gives authorities the power to charge for discretionary services, including those provided under section 2 of the Local Government Act 2000 to promote the well-being of their areas. The Bill will set out what a council may charge, and this amount will be limited to the recovery of costs. The Bill makes provision for the new charging and trading powers to be exercised within the comprehensive performance assessment (CPA) framework.

16. Powers to charge and trade - main issues

16.1 Proposals to allow local authorities to charge for discretionary services and additional power to trade are unlikely to provide any significant source of new income to county councils - and pale into insignificance compared with the loss of income on Social Services from 1 October 2002 created by new Government regulations which actually restrict local discretion on charging for residential and home care services.

17. Performance categories - main proposals

17.1 The Bill lists a number of existing powers that will allow the Secretary of State to remove regulatory controls on authorities or to grant additional powers to them. The Bill makes it clear that the Secretary of State will be able to treat authorities differently according to the performance category in which they are placed by the Audit Commission following comprehensive performance assessment.

17.2 This power may be used, in particular, to treat authorities differently in relation to powers to trade and charge, best value reviews and performance plans and indicators, restrictions on the power to promote well-being and requirements to produce plans and strategies.

18. Performance categories - main issues

18.1 The Council may wish to comment based on its recent experience with the CPA. There appears to be little substantive progress to remove controls and promote greater freedoms and flexibilities even for higher performing councils, as suggested with the introduction of Beacon councils, local public service agreements and CPA.

19. Overview and Scrutiny Committees - main proposals

19.1 The Secretary of State will be given power to make regulations in relation to the exercise by authorities of the power to grant voting rights to co-opted members.

20. Overview and Scrutiny Committees - main issues

20.1 Present legislation allows only for church and parent-governor representatives to sit with voting rights on those overview and scrutiny committees covering education.

20.2 The Council may feel that allowing non-councillors voting rights on committees which only have advisory powers is inappropriate. It could lead to cumbersome arrangements to exercise proportional representation to retain majority party membership. Giving co-opted members voting rights may also be regarded as a confusion of democratic accountability and a step away from the principles of elected local government representation.

21. Conclusion

21.1 The report sets out the main proposals in the draft Bill and the issues and representations the Cabinet may wish to make in response before the deadline of 23 August 2002.

21.2 The issues raised are generally consistent with the evidence submitted by both the County Councils Network and the Local Government Association to the Select Committee but expressed in stronger terms as opposed to welcoming improvements.

21.3 If agreed the County Treasurer will prepare a draft response based on this report and comments made at the meeting for signature by the three group leaders as the County Council's representations on the draft Bill.

Recommendation

1. That the County Council submits representations to the Government on the issues raised in the report, together with any comments the Cabinet wishes to make following discussion at its meeting.

2. That copies of this report be sent to Hampshire MPs.

3. That appropriate action is taken through the County Councils Network, Local Government Association and directly by the County Council during the Bill's passage through the Commons and Lords.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

Published works.

Documents which disclose exempt or confidential information as defined in the Act.

TITLE FILE

Consultation paper on draft Local Government Bill

LGA briefing on Local Government Bill

LGA and CCN written evidence on draft Local Government Bill to the Urban Affairs Sub-Committee of the Transport, Local Government and the Regions Select Committee inquiry