Contact: Jon Pittam, ext 7400, e-mail: [email protected]

1 Three-year revenue and capital settlements

1.1 Most of the Government's financial support for local government services is currently allocated on an annual basis. It includes £46bn of formula grant, £28bn of specific grants and £12bn support for capital investment. Since the Government introduced three-year Spending Reviews for its public spending plans in 1998, it has cascaded three-year financial planning from central Government departments to executive agencies and other budget holders including the National Health Service, the Learning and Skills Council and the Regional Development Agencies.

1.2 The Government now wishes to extend three-year plans to local government, including police and fire authorities, starting in 2006/07. However, local government is not an agency of central Government and, unlike the other bodies, it has its own local taxation powers through the council tax.

1.3 The Government believes that this "would offer greater certainty and stability in funding. It would increase the planning horizon, strengthen financial management and support efficient use of resources at the local level. Better management of risks should enable local authorities to publish at least indicative budgets for the same period and associated local tax rates increasing transparency and accountability at the local level. It also provides an opportunity for three-year settlements to be cascaded to other bodies, building on the [Government's] commitment already made to introduce three-year settlements for schools."

1.4 In part, the proposals are a response to criticisms from local authorities about the tardiness of Government notifications about revenue and capital allocations prior to the start of each financial year.

1.5 The Government's consultation paper includes a series of questions that the Government asks respondents to consider. These questions are listed in Appendix 1, together with suggestions for the County Council's response based on the commentary in this report.

1.6 The concept of three-year Government financial settlements should be supported, in principle. However, there are a number of other changes over the next two years affecting local government finance that cast some doubt on whether it is sensible to press ahead with the introduction of multi-year settlements as early as 2006/07. These changes include:

· the council tax revaluation to be implemented from 2007/08 - valuations will not be published by the Valuation Office until September 2006 which will be after the Government plans to set the first multi-year settlement in November 2005

· the proposed transfer of schools' funding to ring-fenced grants in 2006/07 aligned on the academic year - which potentially could have significant side effects on non-schools budgets

· revisions to the formulae used for Formula Spending Shares (FSS) in 2006/07 following the expiry of the existing freeze on methodology at the end of 2005/06

· the possible expansion of the current pilots for the Government's Local Area Agreements which bring together Government funding streams

· the results of the Lyons Inquiry into local government funding which is due to report at the end of 2005

· the Gershon efficiency review

· the Government's Spending Review for 2006 which is likely to be published in July 2006.

1.7 According to the consultation paper, the Government has decided that the council tax revaluation does not justify postponing the introduction of three-year settlements until 2007/08. It has concluded that there will still be benefits from the early announcement of its support for 2007/08 in November 2005, alongside the 2006/07 settlement, even if the 2007/08 figures have to be qualified as provisional and subject to alteration as a result of the council tax revaluation. Given the Government's recent track record of making last minute changes to its grant settlements to moderate their effects, it would seem to be proposing to take a big risk at local authorities' expense. There seems little point issuing "firm and fixed" figures which are also "provisional and subject to alteration".

1.8 In addition, the Government's consultation paper raises the possibility of radical changes to the FSS system which would be very difficult to design, exemplify, consult on and implement between the end of this consultation period in mid March 2005 and the target for announcing the first multi-year allocations in November 2005. The Government's last attempt, in 2003/04, to reform the grant distribution system led to significant turbulence in grant allocations. As well as the large losses for Hampshire and other South East authorities, the unforeseen consequences (unforeseen by the Government) included the disruption of schools budgets that has eventually led to the Government proposing to transfer schools' funding to a ring-fenced specific grant in 2006/07.

1.9 If the Government maintains its intention of not revisiting the settlement during the multi-year period, there will be no opportunity to unscramble the impact of any of these changes until 2008/09.

1.10 The County Council may take the view that it would be better to postpone the introduction of three-year settlements by twelve months until 2007/08 when the position on these changes should be clearer.

1.11 The Government suggests in the consultation that it may legislate to require local authorities to publish three-year budgets and council taxes that could only be amended in "unforeseen circumstances". This could have the perverse effect of encouraging local authorities to set higher budgets on a precautionary basis, including higher reserves and balances, and should be resisted.

1.12 The Government's track record over the grant settlements from 2003/04 to 2005/06 illustrates the impossibility of fixing council taxes for two years ahead. It will be compounded by the one-off nature of funding in the 2005/06 settlement, formula changes in 2006/07, the unwinding of the grant floor for schools and the proposed ring-fenced specific grant for schools which has yet to be exemplified. Specific information on Gershon efficiency savings and the requirement for an efficiency plan in June each year are also not yet available. The Government has also failed to exemplify the effect of retrospective changes in grant for 2004/05, let alone publishing and sticking to a grant figure for 2007/08.

2 The Government's proposals

2.1 The proposed three-year allocations for local authorities will mirror the Government's biennial Spending Review which is normally announced in the July prior to the first year of the three-year period. The Government envisages confirming the allocations to local authorities set in the previous Spending Review for year one, which would not normally be changed, and announcing for the first time firm and fixed allocations for years two and three. The last two years would reflect any new revisions to the distribution formulae as well as being based on new data. The proposals would give local authorities at least 18 months' notice of their grant allocations.

2.2 As the Government will be halfway through the current Spending Review period, the first multi-year announcement in November 2005 will be transitional. The full process is summarised in the following diagram for the Spending Reviews in 2006 and 2008.

2.3 The allocations will cover the revenue support grant settlement, most specific grants and most capital allocations.

2.4 The main points of the consultation paper are summarised in the following paragraphs, followed by a commentary.

3 Function changes and unforeseen circumstances

3.1 Main points:

· function changes will normally only occur as part of Spending Reviews

· any unavoidable new burdens between Spending Reviews will be matched by additional specific grants

· adjustments for unavoidable transfers of function away from local authorities will be subject to consultation with local government

· authorities should have regard to existing legislation on appropriate reserves when deciding on the level of reserves to cope with unforeseen circumstances under three-year settlements.

Commentary:

3.2 Function and funding changes are currently amongst the more significant sources of uncertainty about grant levels. It remains to be seen whether all Government departments can be restrained from making mid-term changes. The promise of consultation about transfers out of local government gives little comfort. Specific grants for added functions should be allocated on a non-ringfenced basis and absorbed within the general formula grant as soon as possible.

3.3 The requirement to publish three-year budgets may result in higher levels of reserves and balances for the later years of the three-year period, particularly if the proposed budgets and council taxes for those years are perceived as being set in stone. Higher reserves and balances would not represent an efficient use of resources.

4 Formula grant

4.1 Main points:

· the Government is considering a replacement of the existing Formula Spending Share (FSS) system overlaid with grant floors by a simpler system that recognises the overriding influence on grant allocations of the floor mechanism

· this could include a basic floor increase in grant for all authorities plus a variable top-ups to reflect each authority's relative service costs as calculated by formulae and, secondly, resource equalisation

· or a formula-based system with flat rate percentage increases in grant over the three years

· or an underlying formula-based allocation with percentage increases in grant for different groups of local authorities according to how close those groups are to the underlying grant distribution

· or a much simpler formula using just three or four indicators.

Commentary:

4.2 Having introduced a new system of revenue grant distribution as recently as 2003/04 after a lengthy review, the Government now appears to be considering radical changes.

4.3 The consultation paper provides no further explanation of how these options might work in practice. It is difficult to interpret them from the very brief description in the consultation paper. The Government will have very little time to develop them into workable proposals prior to the first multi-year announcement next November. The results of a rushed job would be in place for 2006/07 and 2007/08 if the Government goes ahead with its proposals. There is a strong case for a deferment until 2007/08, so that these ideas can be properly developed and exemplified.

4.4 The Government's justification for possibly abandoning the existing Formula Spending Shares (FSS) system under three-year settlements appears to focus on the impact that relatively crude grant floors currently have in overriding the detailed FSS calculations. The Government envisages that floors will continue but a preferable solution would be to revert to a grant distribution that did not require such severe floors to protect authorities like Hampshire that lost grant so heavily in the 2003/04 review.

4.5 If a simplified system allocated a greater proportion of grant as `basic' amounts per client group and less as top-ups for deprivation, it could also work to the County Council's benefit and should be supported. But it seems unlikely that the Government would devise a system that disadvantaged the authorities that gained in the 2003/04 review.

5 Changes in data used in FSS formulae

5.1 Main points:

· The Government suggests using forward projections of some data for the three-year period, including population and council tax base, whilst using frozen data for other indicators averaged over a number of years to smooth out volatility

· retrospective amendments to grant allocations will be avoided unless a major systematic error is found

· higher grant floors could be used in years where data changes in order to reduce volatility.

Commentary:

5.2 As a principle it is better to use up-to-date information for indicator data in FSSs, in line with the County Council's view of the Government's delay in using socio-economic data from Census 2001.

5.3 There will be a trade-off between the possible accuracy of data used in the formulae and the benefits gained from the certainty provided by three-year settlements.

5.4 A much simplified FSS system using fewer indicators would reduce the difficulties of keeping data up-to-date.

6 Specific grants

6.1 Main points:

· most specific grants will be allocated on a three-year basis

· exceptions could include grants that are paid in response to claims for actual expenditure, bid-based grants, grants based on performance or to support pilot projects.

Commentary:

6.2 The Government should reduce the exceptions as far as possible, eliminating the bid-based and performance-related grants. Even better would be to transfer specific grants into the general formula grant, and for the Government to abandon its plans for the ring-fenced dedicated schools grant.

7 Capital allocations

7.1 Main points:

· firm three-year capital allocations are proposed

· bid-based allocations would be aligned to provide three-year allocations

· capital funding for emergencies could continue to be allocated as and when required - with the funding provided as capital grant rather than borrowing approvals that generate revenue support grant

· funding for very large one-off projects, particularly transport and police, could be awarded on an indicative basis within the three-year cycle

· the definition of "very large" capital projects could vary between classes of authority.

Commentary:

7.2 In principle, local authorities need as much certainty as possible about future Government allocations for capital schemes for planning purposes.

7.3 It is not essential that capital funding for emergencies takes the form of capital grants, provided that borrowing approvals are fully matched by revenue grant towards the loan charges.

8 Three-year budget and council tax information

8.1 Main points:

· local authorities to publish three-year budgets and council tax figures

· initially publication would be on a voluntary basis as primary legislation would be required, but this is likely to become a statutory requirement once legislation is enacted

· publication could be on websites or by inclusion in the budget leaflets sent to council tax payers with their bills

· parishes and other levying bodies may also be required by statute to provide three-year figures to local authorities

· local authorities' ability to alter their three-year projections of budgets and council tax could be limited to "unforeseen circumstance", either on a voluntary or statutory basis

· capping powers will be retained by the Government, covering the three-year period.

Commentary:

8.2 Unlike other organisations to which the Government has cascaded its three-year financial plans, local authorities are tax-setting bodies. They are also elected and the Government should not force local authorities to publish budget plans including the resultant council taxes for future years, particularly for periods that overlap local elections. It would be wrong for an outgoing administration to commit its successor for two or three years. County councils are subject to all-out elections every four years and that will cut across the biennial Spending Review timetable. Some other classes of council hold partial elections in three years out of every four. Political power could change on an annual basis and the new administration should not have to wait for two or three years to set its own budget or council taxes, either above or below previously published levels. Removing that option from newly elected councils is unlikely to encourage the electorate to take a greater interest in local elections.

8.3 Whilst the Government publishes three-year spending plans, it does not commit itself to the rates of income tax, VAT or national insurance for those three years. Nor have its spending plans remained unchanged over the Spending Review period as, in both the 2004/05 and 2005/06 local authority grant settlements, the Government has increased its planned support for local authority spending at short notice.

8.4 The recent move to three-year national pay settlements would also have to be maintained if local authorities are to have the necessary certainty about a major part of their cost base for the three-year period.

8.5 The County Council already publishes in its budget book each year a forecast of its budget for years two and three based on current policies. This is not intended to be a fully costed three-year financial plan including new developments and initiatives. The projected percentage increase in the council tax for years two and three are also published, based on assumptions about Government funding. None of this information is included in the budget leaflet sent to each council tax payer. Further statutory requirements to publish information are not necessary.

8.6 There can be no objection to publishing indicative figures for budgets and council taxes for a three-year period. Medium term planning is an important financial management tool which can help to promote longer term stability and certainty. But local authorities should retain full flexibility to change their published budgets and council taxes for years two and three as they see fit, irrespective of the electoral cycle. They can be encouraged, or even required, to explain any such changes but it is important that local authorities, like central Government, retain the freedom to amend their tax raising policy on an annual basis and not just in "unforeseen circumstances".

8.7 No commercial organisation would commit itself to such rigidity in a constantly changing environment. A three-year plan is a plan - and plans, by definition, should be capable of being amended to adapt to new circumstances such as political changes at the national or local level, economic cycles, etc. It should not be a straitjacket forced on local authorities that would undermine the credibility of the underlying three-year planning process.

9 Recommendations

9.1 The recommendations are contained in the decision sheet summary which precedes this main report.

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:

1. Published works.

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

TITLE FILE

ODPM consultation paper on Three-year Revenue and Capital Settlements issued 15 December 2004

Appendix 1

Responses to questions raised by the Government in its consultation paper on Three-year Revenue and Capital Settlements

Formula Grant Settlement

1. Views are invited on the future shape of the formula grant system for three-year settlements.

The County Council would support a simplified distribution formula that gave greater weight to the basic amounts per client and less to judgemental top-ups for deprivation.

Developing such a system, exemplifying the results and consulting with local authorities and other interested partners would be a time-consuming exercise. The County Council questions whether there is sufficient time available for such work between now and November 2005 when the first multi-year settlement should be announced by the Government, covering 2006/07 and 2007/08. It is essential that any such proposals are fully exemplified and are subject to full consultation with local government prior to, and not as part of, the announcement of the settlement for 2006/07 in November 2005.

The County Council is also concerned that the proposed changes affecting the local government finance system over the next two years, including the council tax revaluation, the introduction of ring-fenced grants for schools and the end of the current freeze on methodology, will generate too much uncertainty to justify the announcement of firm and fixed settlements for 2006/07 and 2007/08. The County Council urges the Government to postpone the introduction of multi-year settlements until 2007/08.

The Government should reflect on whether it will be able to provide "firm and fixed" three-year settlements in practice, in the light of its inability in recent years to publish one-year settlements without subsequent short-term emergency amendments to moderate the impact on local authorities.

2. Views are invited on when changes in the grant formulae, data and funding totals should be allowed to happen.

The County Council agrees that the formulae, data and funding totals for the overlapping year one of each three-year settlement should not normally be re-opened. New information would be introduced in the figures for year two.

3. Views are sought on when, how and how far to update the data used in the formulae.

A simpler formula focusing on basic amounts per client would reduce the number of indicators that require updating.

As a point of principle, the formulae should use data that is as up-to-date as possible. The current situation in which 14 year old Census 1991 data is still being used in the FSS formulae, despite the availability of Census 2001 data, should not be allowed to happen again.

Once determined, data would have to remain fixed throughout each three-year period. There should be no mid-period revisions. The County Council would favour projecting indicator data over the three years wherever possible.

4. Views are invited on the Government's preference for not, as a rule, making retrospective amendments to the formula grant settlement, and on whether floors should be set at higher levels in change years.

The County Council agrees that retrospective amendments to the three-year settlements should be avoided for all but the most significant systematic errors. As such errors are most likely to have been made by the Government, it should provide additional funding to compensate those local authorities that have suffered losses without requiring other authorities to contribute. This approach should have been adopted with the correction of the Government's errors on population data in the Amending Report for 2003/04.

Floors should be set at the minimum level necessary to protect local authorities that have lost significant levels of grant. The current system's reliance on floors would not be necessary if the Government had not transferred such large amounts of grant from local authorities in the South East, such as Hampshire, to the North and the Midlands in the 2003/04 review of revenue grant distribution.

There does not appear to be any logic behind suggestions that floors should be set at higher levels in change years. If there is more volatility, the floor does not have to be set at a higher level to protect the biggest losers. It would, however, mean that gainers would find their gains scaled back even more severely to pay for the higher floor.

Specific Revenue Grants

5. Views are invited on:

- whether there are ways in which the categories of grants identified for exclusion from three-year settlements could be better incorporated into a three-year framework; and

- whether the types of grants identified are indeed those where allocation on a three-year basis would be most difficult.

The Government should reduce the number of specific grants by transferring them to the general formula-distributed grant. It should also abandon the proposals to fund schools by a ring-fenced specific grant. Bid-based and performance-related grants should also be eliminated. This would remove the difficulty of incorporating them within the three-year settlement framework.

6. Views are invited on the Government's proposals for increasing predictability of annual grants.

If specific grants cannot be eliminated and they have to be determined on an annual basis, the Government should provide as much information as possible about the allocation mechanism to allow local authorities to forecast likely levels of grant for years two and three.

Any additional specific grants used to fund function changes should be on a non-ringfenced basis and should be absorbed within the general formula grant at the earliest opportunity.

Again, the Government's track record is not helpful. For example, it has both arbitrarily cut the size of the grant available for Supporting People and also changed the formula used in its distribution.

Capital Allocations

7. Views are invited on the Government's proposals for treating bid-based programmes and performance rewards.

As for revenue specific grants, this issue would be avoided if the Government eliminated all bid-based and performance-related capital allocations. They should be transferred to the single capital pot.

If any such allocations remain, the Government should align the announcement of the amounts with the three-year cycle.

8. Views are invited on the proposed handling of funding for emergencies.

Allocation of one-off Government capital support for emergencies should continue. However, this should be limited to provisions for true emergencies and should not become an excuse for top-slicing increasing amounts from general allocations.

It is not essential that capital funding for emergencies takes the form of capital grants, provided that borrowing approvals are fully matched by revenue grant towards the loan charges.

9. Views are invited on the options for defining major projects.

Major projects usually have a significant lead-in period that may extend beyond three years. It would be helpful if the Government could, at least, give indicative approvals within the three-year framework. Projects that are supported in full by the Government with capital grants or supported borrowing approvals would not necessarily disrupt local authorities' budget plans if support for them was confirmed by the Government after the start of a three-year period.

If there is to be a threshold for defining major projects, it should reflect the size of the authority concerned. Thresholds could be set by class of authority.

10. Views are invited on whether the benefits of three-year allocations would outweigh the advantages of the current arrangements for small bid-based programmes.

As stated above, bid-based programmes should be eliminated as far as possible. Capital allocations that are fully supported by the Government with capital grants or borrowing approvals should not disrupt local authorities' three-year plans.

11. Views are invited on whether a move to capital grants for emergencies or large one-off projects would be helpful.

It is not essential that capital funding for emergencies or large one-off projects takes the form of capital grants, provided that borrowing approvals are fully matched by revenue grant towards the loan charges.

12. Views are invited on what more might be done to provide three year certainty for the Private Finance Initiative (PFI).

There should be a level playing field between PFI and conventional capital procurement so that local authorities, not Government departments, can decide the optimum procurement method.

Three-year Budget and Council Tax Information

13. Views are invited on the proposed general approach to providing greater stability and certainty through the publication of forward indications of budget levels and council tax.

The County Council is opposed to any statutory compulsion to publish three-year budgets and projections for the council tax. It has no objections to publishing such information but this should continue to be on a voluntary basis. It is also opposed to any reduction in its flexibility to amend its budget and council tax projections for years two and three. Such amendments should not be restricted to "unforeseen circumstances" only.

Local authorities are elected and tax-raising bodies, unlike the other organisations to which the Government has cascaded three-year financial plans. Some local authorities hold elections for part of their council in three years out of four. It would be wrong for a council to be able to commit a successor to its budget and council tax plans. Equally, it would wrong for incoming administrations to have to abide by their predecessor's plans for two or three years, by which time they may have had to face the electorate again without being able to take any significant action on the financial and service management of the authority. Removing from newly elected councils the option to implement their manifestos is unlikely to encourage the electorate to take a greater interest in local elections.

Whilst the Government publishes three-year spending plans, it does not stick to them, as demonstrated by the changes made in the Pre-Budget Report in November 2004 to the SR2004 figures for local authority support published as recently as July 2004.

The Government also does not commit itself to three-year tax rates for income tax, VAT or national insurance. Such commitments about the council tax should not be imposed on local authorities.

If the flexibility to amend budget and council tax projections is removed, local authorities would have to be increasingly cautious about the levels of reserves and balances they provide for, particularly for years two and three. Holding higher levels of reserves and balances because of the Government's imposition of fixed three-year plans would not be an efficient use of taxpayers' money.

No commercial organisation would commit itself to such rigidity in a constantly changing environment. A three-year plan is a plan - and plans, by definition, should be capable of being amended to adapt to new circumstances such as political changes at the national or local level, economic cycles, etc. It should not be a straitjacket forced on local authorities that would undermine the credibility of the underlying three-year planning process.

14. Should there be legislation requiring parish councils and levying bodies to publish forward projections of budgets and in the case of parishes corresponding figures for contributions to council tax to mirror three-year settlements?

The County Council believes that the publication of three-year budget and council tax information should remain voluntary, with local authorities retaining the flexibility to amend future years' figures. In such circumstances, legislation is not required to force parish councils and levying bodies to provide three-year figures. It would place an unnecessary burden on small parish councils.

15. Views are invited on how a legislative basis for requiring forward projections of budgets and corresponding figures for contributions to council tax to mirror three-year settlements might best be achieved.

The County Council is opposed to legislation requiring the publication of three-year budgets and council tax projections.

16. Views are invited on the options for, and practicality of, a voluntary arrangement to the same effect.

Voluntary publication should continue, as at present, in local authorities' budget books and on their websites, if appropriate. There should be no statutory requirement to include such information in budget leaflets sent to all council tax payers with their bills. The budget leaflet should remain focused on providing information about the council tax decision for the year in question. Consultation with the public about plans for subsequent years should be undertaken separately.

17. Views are sought on:

- what types of circumstance might merit alteration to three-year budget plans and council tax forecasts, consistent with the aims of transparency and stability underpinning three-year settlements; and

- what controls could be put in place to ensure that alterations are only made in these circumstances, on either a statutory or a voluntary basis.

As explained in the answer to question 13, local authorities should retain full flexibility to change their budgets and council tax projections over the three-year period. Publication should remain on a voluntary basis and would include, where appropriate, explanations for variations from previously published figures.

Context for Implementation

18. Once initial Local Area Agreements are in place, they could in principle be aligned with the cycle of three-year settlements. Views are invited on the merits of such an approach and its practicability.

The possible extension of the current pilots for Local Area Agreements is another reason why the introduction of three-year settlements should be deferred until 2007/08.

19. Views are invited on how best to move to a three-year settlement for HRA subsidy consistent with the principles in the consultation paper.

No comments.

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