Contact: Jon Pittam, 01962 84 7400; [email protected]

1 Introduction

1.1 The Office of the Deputy Prime Minister (ODPM) issued a consultation paper on 19 July 2005 setting out options for changes to its system for distributing revenue grant to local authorities from 2006/07. The closing date for responses to the consultation is 10 October 2005.

1.2 This report summarises the key issues raised by the consultation paper, which runs to over 300 pages. Suggested responses to the 39 questions asked by the Government in the consultation paper are set out in Appendix 1.

2 Background

2.1 The current methodology for calculating Formula Spending Shares (FSSs) was introduced by the Government in 2003/04 following a major review. FSSs are measures of local authorities' need to spend, relative to other authorities, for the purpose of distributing revenue support grant (RSG) between authorities. The methodology has been frozen for the three years 2003/04 to 2005/06, with only the data used in the formulae being updated each year.

2.2 The Government wishes to make a number of changes to the grant distribution system from 2006/07 including:

· transferring the funding of schools to a 100% specific grant from the Government, known as the Dedicated Schools Grant (DSG). Currently school budgets are funded, along with other local government services, primarily by the formula grant (ie, RSG and business rates) and the council tax

· the introduction of three-year grant settlements

· an alternative revenue grant system which would make it more difficult to identify what the Government assumes will be the national council tax rise to support its spending plans

· a further `resource equalisation' adjustment which, as in 2003/04, transfers grant from authorities such as Hampshire to areas of `high need and low resources'

· changes to FSS formulae now that the current three-year methodology freeze has ended, including those changes necessary to incorporate data from Census 2001 to replace Census 1991 data. These changes particularly affect the FSS for personal social services.

2.3 Overall, the proposed changes are likely to be disadvantageous to the County Council. If the Government adopts the options that are most disadvantageous to the County Council, the `worst case' options would result in an overall loss of grant in the longer term of about £45m. Short-term floor damping arrangements may protect the County Council from the immediate effects of all these losses but damping arrangements will unwind over time. The best case - or least disadvantageous options - would result in a longer term loss of £9m, as shown below.

2.4 A detailed response to the consultation proposals is included in Appendix 1. The following sections of the report comment on the most significant of the proposed changes.

3 Direct funding of schools

3.1 The Department for Education and Skills has issued a separate consultation paper on its proposals for the method of distributing the proposed Dedicated Schools Grant to local authorities. This consultation paper is the subject of a separate report on this Agenda. Local authorities will continue to be responsible for distributing the grant between schools using local formulae.

3.2 The ODPM's consultation paper deals with the changes necessary to the remaining grant distribution after £25bn of local authorities' total formula grant funding (£45bn) has been transferred to the Dedicated Schools Grant. It suggests that `customised' damping of grant allocations may be necessary in 2006/07 to protect those authorities that chose to spend less on schools in 2005/06 than their schools FSS. Such authorities would lose grant in 2006/07 following the transfer if no damping is applied. However, it is not equitable that authorities that chose to spend their schools funding on other services in 2005/06 should be protected in 2006/07 at the expense of authorities, such as Hampshire, that chose to supplement their schools FSS with additional funding raised from the council tax. Nor should grant losses resulting from this change be singled out for special damping arrangements from all the other proposed data and methodology changes.

3.3 The Government's customised damping proposals should be resisted, leaving the effects of the transfer of schools funding to be accommodated in whatever general damping arrangements are included in the RSG settlement.

3.4 Transferring £25bn of the existing formula grant (RSG and business rates) to the Dedicated Schools Grant will require the Government to change the existing per capita basis for distributing business rates income to local authorities. This is because some authorities' formula grant allocations will be less than their per capita business rate allocation and, it is assumed, the Government will not wish to allocate negative amounts of grant to local authorities. In practice, RSG and business rates will become merged which will not help local government in its long running aim of returning business rates to full local control.

4 Three-year grant settlements

4.1 Following a consultation process earlier in 2005, the Government has now confirmed its proposals for introducing three-year grant settlements. It intends to announce firm three-year grant allocations aligned with the Spending Review cycle. The FSS formulae will use projections of population and council tax base for the three years. Other data that is more difficult to project will based on frozen three-year averages of past data.

4.2 No retrospective amendments will be made to the settlements unless a major systematic error is discovered. If new responsibilities for local government are added between Spending Reviews, funding will be provided in the interim as specific grants.

4.3 The first multi-year settlement will be announced in late November or early December 2005 for 2006/07 and 2007/08 (the last two years of the current Spending Review). But because of the uncertainty surrounding the impact of the council tax revaluation, due to take effect from April 2007, the figures for 2007/08 will be provisional. The first full three-year settlement figures will be announced in 2008/09.

4.4 It is not clear whether the Government still intends to require local authorities to set firm council taxes for each year covered by the three-year settlements, as proposed in the earlier consultation paper. It is suggested that the County Council reiterates its opposition to such prescription.

5 Alternative grant systems

5.1 The Government wishes to move away from a grant system that includes explicit figures, such as FSSs, that can be used as spending targets for individual authorities. It has frequently emphasised since the last review in 2003/04 that FSSs are only a relative measure of authorities' spending need, to be used solely for the purposes of distributing grant. The Government found it necessary to make an exception to this principle, for the schools FSS, which it has used to make sure that FSS increases are passported by local authorities to schools' budgets. Now that schools will no longer be included in FSS, transparency is not so critical to the Government's objectives and it now wants to hide FSSs to prevent their `misuse' by others. In practice what the Government really wants to do is to break the link between FSS and the assumed national council tax required to finance its spending plans. Council tax increases can then be said to be entirely the result of local authority decisions, with the Government attempting to obscure the major impact its grant changes have on local council tax rises.

5.2 The Government has devised a very complex proposal for an alternative grant system that involves four `blocks' covering for each authority:

· their relative needs

· their relative resources

· a basic amount, to allocate any residue after meeting needs and resources

· damping, to reduce the impact of year-on-year changes.

5.3 Relative needs for each authority would still be calculated by formula, probably using a similar methodology to FSSs. The results would be converted into index figures based on a total for all services of 1.000000. This would add an unnecessary additional layer of complexity at a time when the Government should be engaging the public in understanding and accepting the local government finance system. If it is introduced for 2006/07, it would also pre-empt Sir Michael Lyons' review of local government funding. Lyons is expected to report before the end of 2005.

5.4 No exemplifications of the impact of the alternative system have been published in the consultation paper. The Government may intend the results to be neutral for individual authorities, although figures published with earlier technical papers indicated that this might be difficult to achieve. One paper included figures showing a small loss of grant for the County Council of £0.8m (0.1%). However, the suggested system includes increased scope for `ministerial' judgement, including setting the relative size of the four blocks. This could be used to divert resources towards favoured areas, probably in ways that are opaque.

5.5 These proposals would take the system even further away from the principles agreed at the last review in 2003/04, in particular that a grant distribution system should:

· be fair

· be transparent

· be easier to understand and explain

· be more stable and predictable

· promote accountability

· be determined in an open and accessible way.

5.6 The other principles developed at the last review were that the system should:

· compensate local authorities with higher needs or lower resources

· reflect the diverse needs of local authorities

· allow local authorities to plan and deliver best value

· provide an adequate local tax base

· promote local choice

· provide incentives for local authorities to pursue value for money

· not be used to set capping limits.

5.7 The County Council should oppose the Government's proposals for an alternative grant system. Unnecessary changes to the system are particularly inappropriate now at a time when stability is essential with the potentially disruptive impact of the transfer of schools funding, other proposed formulae changes, the council tax base revaluation, the expansion of Local Area Agreements and the implementation of Gershon efficiency savings. There is a strong risk from the Government's point of view that council tax levels will drift even higher as authorities that lose grant struggle to absorb their losses whilst gainers spend their windfalls.

6 Resource equalisation

6.1 The average council tax in England for 2005/06 of £1,214 per band D is 10% higher than the level assumed by the Government in the RSG settlement for 2005/06. In part, this excess is a result of local authorities spending above their FSS, with that excess falling wholly on council tax payers. Spending above FSS has a more significant impact, in terms of increases in the council tax, on council tax payers in local authorities with relatively low resources in the form of their council tax base, than in comparatively affluent areas such as Hampshire.

6.2 The Government can redress this imbalance by increasing the FSS totals nationally so that they match actual total spending levels for FSS, without adding any extra grant to the system. This simple technical adjustment, which the Government calls `resource equalisation uplift', has the effect of transferring grant away from `low need / high resource' areas, such as Hampshire, to `high need / low resource' areas.

6.3 Resource equalisation uplift was a major factor in the County Council's grant losses in 2003/04. The Government now proposes a further resource equalisation adjustment which will again transfer grant away from areas such as Hampshire. It plans to uplift the FSS totals for three services, personal social services, police and fire, on which local authorities are spending above FSS. However, the Government has chosen to ignore other FSS blocks where spending may be below FSS, including highways maintenance and capital financing. In total for all services, local authorities were spending below FSS according to the latest outturn data available for 2003/04 provided in the consultation paper. This suggests that there is no justification for a further resource equalisation uplift to FSS totals nationally. More recent data, for 2005/06 for example, has not been provided by the Government but it is likely that the pattern of lower spending on highways maintenance and capital financing will have persisted. So even if overall spending in 2005/06 is now above FSS, the Government should not cherry-pick the personal social services, police and fire FSSs for resource equalisation.

6.4 It is difficult not to conclude that the Government's proposals are a deliberate attempt to move grant to certain areas of the country. They should be strongly resisted as the resultant grant losses in Hampshire will lead further pressure on service levels and council taxes. If the Government wishes to help `high need / low resource' areas, it should add extra grant to the system, not take it away from the council tax payers of areas such as Hampshire.

6.5 There is also a vicious circle in these resource equalisation adjustments. South East local authorities (outside London) were significant losers from the formula changes and resource equalisation adjustment in 2003/04. Many had to increase their council tax levels as a result. Meanwhile, authorities elsewhere in the country that gained from the formula changes and resource equalisation in 2003/04 have increased their spending rather than using the redistribution of resources to reduce their council tax levels. As a result, nationally, resource equalisation has pushed the average council tax above the Government's assumed level, with spending on services such as personal social services moving further above FSS. This has now triggered the Government's wish to implement further resource equalisation. More grant will be transferred away from the South East which, in turn, will lead to further council tax rises. And so on, particularly when it is combined with the South East's losses from the proposed new personal social services FSS formulae.

7 Social services formulae

7.1 With the removal of schools funding, personal social services are now the County Council's largest service supported by FSSs. It has been necessary for the Government to review the FSS formulae for social services to incorporate data from Census 2001 and because of concerns that the existing formulae had become increasing inaccurate in the light of changes in recent years in the delivery of social services.

7.2 The present structure of the formulae has been retained with a basic amount per head of the client population plus top-ups for deprivation, age (older people), foster care costs (children) and the higher costs of providing services in some parts of the country (the area cost adjustment).

7.3 Consultants have been engaged by the Government to develop new formulae for the deprivation and other top-ups for the three FSS sub-blocks for children, older people and younger adults. These changes to the social services formulae have the most significant impact on the County Council of all the proposed formula changes in the consultation paper. The potential losses on the older people and younger adults formulae are particularly large as the following table shows.

7.4 The Government published an exemplification in 2003 of the effects of replacing Census 1991 data in FSS formulae with data from Census 2001. This showed that the County Council would gain about £7m, based on the 2003/04 grant settlement. This gain was almost wholly on the children's FSS with about only £0.5m on the FSS for older people and younger adults. The Census 2001 data have been incorporated in the new formulae and are reflected in the figures shown in Table 2. There is no further pick-up still to come from Census 2001. But for the effect of Census 2001 data, the loss of £0.8m from the proposed new children's FSS formula would have been much larger.

7.5 The losses in Table 2 arise primarily because the Government, based on the consultants' research, has reduced the amount allocated as a flat rate basic amount per head of client population (eg, the resident population aged 65 and over) and increased the amount allocated as a deprivation top-up. As Hampshire has relatively low deprivation scores, it loses. For example, the basic amount per older person under the existing formula is £405.32 per head. Under the worst option now proposed, it would be reduced to £257.92.

7.6 The Government has continued its approach of funding in full deprivation costs above a threshold of the least deprived authority. Any residue is then allocated as a basic amount per head of client population. This should be reversed for all FSSs, with the basic amount funded in full and any residue, only, used to fund deprivation costs.

7.7 If the worst case option is implemented, Hampshire would receive an FSS per older person of £512 compared with Hackney's £2,030. There are likely to be some higher costs of providing services to older people for a population with the characteristics of Hackney but it stretches credibility to suggest that those costs are four times as high as in Hampshire. Indeed, actual budgeted spending per head on older people in Hackney in 2005/06 is about three times as much as in Hampshire.

7.8 Despite the Children's Act requiring local authorities to integrate services for children, the Government has not proposed merging the existing separate FSS blocks for Local Education Authority services and children's personal social services, or pooling the existing separate specific grant streams.

7.9 The Government's proposals for allocating the Supporting People grant for 2006/07 and 2007/08 are expected to be issued in September 2005 for consultation. The Government has already announced that the national total for the grant will be reduced. The maximum fall in grant suffered by individual authorities will be limited to 5%. This is likely to be Hampshire's position as changes to the funding formula will probably transfer grant to other parts of the country. This will compound the impact of losses from the proposed FSS formulae for personal social services.

7.10 The Government's changes to the FSS formulae for services other than personal social services are less significant and are dealt with in the response to the Government's consultation questions, attached as Appendix 1.

8 Funding for deprivation

8.1 A key part of the FSS system continues to be the distribution of funding to equalise local authorities' differing needs to spend on services. This is achieved through the deprivation top-ups in the FSS formulae. As highlighted earlier, the Government is proposing some new formulae which will increase the level of funding for deprivation at the expense of the basic amounts per client, particularly on personal social services.

8.2 In many cases, these deprivation costs will continue to be double or treble funded, on top of the specific grants that are also allocated on the basis of deprivation indicators and allocations such as the £525m Neighbourhood Renewal Fund (NRF). The County Council is not able to access the NRF because Hampshire does not rate highly enough on the Government's deprivation measures, with the smaller pockets of relative deprivation in Havant, Gosport and Aldershot falling below the Government's radar.

8.3 Formula grant funding should be focussed on providing an adequate basic amount per client and only then should deprivation-related needs be funded.

9 Response to the consultation

9.1 It is suggested that the County Treasurer, in conjunction with the Leader, responds to the Government's consultation on basis of the issues raised in this report, together with the answers to the Government's specific consultation questions set out in Appendix 1, including any additional points or amendments made by Cabinet at the meeting.

9.2 The response will be copied to Hampshire MPs, the Local Government Association and the County Councils Network. Lobbying on behalf of the County Council's position will continue throughout the autumn and winter through stakeholders and other interested parties, including the business community, the voluntary sector, and ratepayer and community organisations.

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

None

Appendix 1

Draft responses to the Questions raised by the Government in its Consultation on Formula Grant Distribution

Schools Transfer

Q1: Do you think that there should be a customised damping system?

No. The general grant floor should provide any necessary protection. There is no case for providing additional protection through a customised damping system for education authorities who decided in 2005/06 to give a higher priority to non-schools spending than to schools.

At a technical level, it is not clear how the proposed customised damping system, as described in the consultation paper, could be applied in practice in 2006/07.

Q2: Do you have comments on the Government's other proposals:

(i) to adjust the base using spend figures

This is a pragmatic solution, provided that a customised damping system is not also applied.

(ii) to isolate police, fire and shire district authorities from the effects of the transfer?

This would be equitable.

New Grant System

Q3: Whether we should use the proposed alternative grant system?

No. This proposal appears to be motivated by a wish to prevent commentators from treating formula spending shares (FSSs) as the Government's view of how much individual local authorities should spend.

The Government's proposed alternative system, however, adds unnecessary complexity to the system. It conflicts with the widely accepted principles for a grant distribution system that it should be transparent and easy to understand and explain. It is perverse to add a further layer of complexity solely to stop some people from misunderstanding the existing system.

The proposed system provides more scope for ministerial `judgement' in influencing the results. Such judgements should be reduced to the minimum and where they are applied, they should be transparent.

It is argued that the new approach would fail most of the Government's own principles that a grant distribution system should be:

· fair (if perceived open to "judgement")

· transparent

· easier to understand and explain

· more stable and predictable

· promote accountability (if Government "hides" its grant changes from the consequent impact on council tax)

· determined in an open and accountable way

Education - Local Education Authority (LEA) FSS Block

Q4: Do you think we should remove the element for Further Education residual pensions?

Yes. If some local authorities are manipulating the spending data on which the existing FSS element is based and if the Government feels that it is unable to regulate that manipulation, it is sensible to remove this element.

Q5: Do you think the LEA damping block should be removed?

Yes. Whilst Hampshire received LEA damping in 2005/06, there is no technical justification for applying damping to FSS blocks whilst there is also a general grant floor mechanism in place to protect those authorities with low FSS increases.

Q38: Do you agree that the January pupil count should be used instead of the September pupil count as the source for pupils aged 11 and over? (Additional question following publication of the Consultation Paper)

Yes, data from the January pupil count should be used in the FSS for the LEA block. This will be consistent with proposals from the Department for Education and Skills to use January data in the calculation of the Dedicated Schools Grant. This is preferred even though the data used for the LEA block will be a year out-of-date because of the earlier deadline for data used for FSSs (ie, January 2005 data will be used for 2006/07 FSSs).

Personal Social Services - Children's Services

Q6: Do you agree with the Government's proposal to implement option SSC1? If not, what alternative would you propose?

No. The basic amount per child should be increased, not reduced as proposed in option SSC1 (from £121.57 in the existing formula to £90.96). The increase in the basic amount should be funded by reducing the top-up for `deprivation' which has increased by an average nationally of over £30 per child in the proposed formula.

The Government should reverse its approach of only funding the basic amount as a residue after fully funding deprivation costs above the threshold of the least deprived authority. The basic amount per client indicator for all FSSs should be funded in full with any residue, only, used to fund deprivation costs.

The proposals reverse the agreed methodology of a basic amount, plus top-ups for deprivation and additional costs. Making the basic amount the residual also takes no account of the double-counting of specific grants and neighbourhood renewal fund to assist deprivation and deprived areas.

Incorporating the much-delayed data from Census 2001 into the Children's FSS should have benefited the County Council. It appears that the proposed formula has been tailored to offset the redistributive effects of incorporating this data.

Q7: Which option for updating the Foster Cost Adjustment do you prefer?

Option SSC2. As stated in the consultation paper, it is better statistically.

Q8: Do you think that there should be specific floors with either ceilings or scaling factors on the children's social services FSS to limit the extent of the changes?

No, it is not necessary to apply floors to individual FSSs if a general grant floor is in place.

It may be necessary to apply a floors damping arrangement to social services specific grants, if the new FSS formulae are used to distribute such grants.

Personal Social Services - Older People

Q9: Which needs formula option do you prefer - SSE1 or SSE2?

The existing formula should continue to be used whilst more comprehensive research is undertaken by independent consultants to develop a fair and credible formula.

The consultants' research used to develop these options was based on, at most, just 17 of the 150 social services authorities. Not all these authorities were able to provide all the information required by the consultants. As a result, the data used was limited and unrepresentative, with over-sampling of London and Metropolitan areas, even though a higher percentage of older people live outside the urban centres. Only one large authority (Hampshire) was included in the sample.

If the Government is insistent on using one of these two inadequate formulae, option SSE2 is the least damaging. But that should not be interpreted as a positive vote for option SSE2.

Both options reduce the basic amount per older person, from £405.32 in the existing formula to £257.92 (option SSE1) and £368.01 (option SSE2), with corresponding increases in the top-ups for deprivation. The basic amounts should be increased substantially in a new formula by reducing the top-up for deprivation. Again a reduced basic amount makes the situation of double counting deprivation factors through the use of specific grants and neighbourhood renewal allocations even worse than at present.

According to option SSE1, it costs four times as much to provide for an older person in Hackney (£2,030 per person) compared with Hampshire (£512 per person). This is not credible.

Q10: Do you agree with the proposal to revise the Low Income Adjustment to include 2001 Census data?

Yes.

Q11: Which method of distributing the sparsity top up do you prefer?

Either option is acceptable. (Not a principled response).

Q12: Do you favour increasing the quantum for the sparsity adjustment to more than 0.4%?

No. Whilst this change would have little impact on Hampshire, in principle the County Council supports allocating as much as possible through the basic amount per head of population and minimising all top-ups other than the Area Cost Adjustment.

Personal Social Services - Younger Adults

Q13: Which option do you prefer for the Younger Adults Social Services formula?

The research on which these options is based is extremely limited and unrepresentative. Hampshire contributed data to the research but it is the only large local authority in the sample which is otherwise heavily slanted towards London and other urban areas. Some parts of the research appear to be based on data from only 7 of the 150 social services authorities. Further, wider-ranging research is required.

If the Government is insistent on using one of these two inadequate formulae, option SSA1 is the least damaging. But that should not be interpreted as a positive vote for option SSA1.

Police and Fire

Questions Q14 to Q19 concern changes to the FSSs for Police and Fire services. They do not directly affect the County Council.

Highway Maintenance

Q20: Do you agree that back lanes should be included in the highway maintenance formula?

This appears to have minimal impact on the highways maintenance FSS. As a more general point, the County Council is concerned about the validity and consistency of local authorities' data for road lengths used in the FSS formulae, particularly for unclassified roads. It is essential that the Department for Transport applies appropriate validity checks on road length data submitted by local authorities.

Environmental, Protective and Cultural Services (EPCS)

Q21: Do you think we should adjust the coefficients for concessionary fares?

Whilst this does not directly affect county councils, it would be better to increase the basic amount per head of population in the lower tier EPCS formula than to make the proposed changes to the weightings of deprivation indicators which appear to be based solely on `judgement' rather than any objective evidence.

Q22: Do you think we should make any further changes to coefficients; for example, it has been argued that we should do so to take into account the increasing expenditure on waste?

The Government should introduce a separate FSS block for waste management costs, as argued in the paper (ref SWG/05/47) submitted to the Settlement Working Group in June 2005 by the Society of County Treasurers (SCT). Waste management represents a significant cost to local authorities, larger than some other costs for which there are separate FSS blocks. Waste costs are also rising significantly.

If the Government is insistent on not introducing a separate waste management FSS, it should change the weightings in the formula to increase the amount allocated by the basic amount per head of population. This would be consistent with the findings of the SCT paper that resident population is a good indicator of the need to spend on waste management.

Q23: Do you think we should update the fixed cost element?

No, the fixed cost element should be deleted. The need for such support for smaller authorities has been overstated and is a disincentive for partnership and joint working.

If the Government insists on providing a fixed cost element it should be restricted to shire districts and funded by top-slicing the lower tier EPCS control total.

Q24: Do you agree with the proposed method for transferring COWs to the Environment agency?

No comments. Does not affect county councils.

Q39: Do you agree that an adjustment to the 2001 Census based country of birth indicator used in EPCS should be made? (Additional question following publication of the Consultation Paper)

No. The justification for the proposed adjustment appears to be speculation that the people omitted from Census 2001 in some urban areas (for whom a subsequent addition has already been made to population estimates used in FSSs) may have different country of birth characteristics to those that did respond to the Census. There appears to be no evidence to support this speculation and so no adjustment to the country of birth indicator should be made.

Capital Financing

Q25: Do you think we should remove the Interest Receipt elements?

Removal of the two (negative) interest receipts FSS blocks will have significant redistributional effects, as the Government's exemplifications show. Whilst removal would help to simplify the grant distribution system, it is essential that any consequent changes to the system reflect the relative ability of classes of authority to earn interest.

Q26: If we retain one or both of the Interest Receipt elements, do you have any views on how they should be distributed?

If the elements are retained, no changes to the existing methodology are necessary beyond ensuring that it effects the relative ability of different classes of authority to earn interest.

Q27: If we remove the Interest Receipt elements, should we reduce other FSS totals to compensate, or not? And if we reduce other FSS elements, where should we make the reductions?

Assuming that the Government has no plans to increase FSSs and grant if it removes the interest receipts FSSs, it will be necessary to reduce other FSS control totals. Otherwise, the effect would be further unwarranted resource equalisation uplift which would be particularly unjustified as, according to the Government's own figures, local authorities are already spending less than the FSS total on capital financing costs net of interest receipts.

The necessary reductions should be made to the non-capital finance FSS control totals but only if the reductions first reflect the ability of each class of local authority to earn interest receipts. In particular, the exemplified reductions in option CF3 appear to ignore lower tier authorities' greater access to interest receipts from housing.

Recognising waste management costs in the Capital Finance FSS

The Government's consultation proposal does not include any changes to the capital finance FSS to recognise the costs incurred by the County Council in providing capital infrastructure for waste disposal facilities through its waste service contract with its private sector provider. This innovative service contract has the characteristics of a public finance initiative (PFI) arrangement but because it was entered into before the introduction of the Government support for PFI projects, it does not attract revenue grant towards the cost of providing new waste disposal facilities.

The County Council urges the Government to rectify this unfair anomaly by recognising the Hampshire contract as the equivalent of a PFI arrangement for revenue support grant purposes.

Area Cost Adjustment

Q28: Do you have any comments on our intention to use the full Annual Survey of Hours and Earnings (ASHE) data set to calculate the ACA?

The Government should use the Labour Force Survey for the ACA as it provides more comprehensive data for lower paid employees. This would give a more accurate recognition of the extent of higher costs experienced in areas such as Hampshire.

Q29: Do you think that we should remove the very small rates cost adjustment, or do you think that we should update the weighting of the RCA in line with 2003/4 expenditure data?

In principle, the ACA should reflect all elements of higher costs in areas such as Hampshire, including business rates.

Q30: Do you agree with the Government's proposal to retain the current method of setting the lower limit for options ACA1-3?

There should be no lower limit so that the ACA recognises the full extent of higher costs in areas such as Hampshire.

Q31: Do you think that we should calculate a separate ACA factor for each upper tier authority?

Yes. In particular, it is essential that Hampshire County Council is not linked to the Isle of Wight for ACA purposes whichever option is chosen. The County Council has argued strongly for separate treatment ever since the Government decided to combine the two areas, without consultation, in the RSG settlement for 2003/04. There is no justification for artificially reducing Hampshire's ACA factor, and therefore its grant, simply to direct grant towards the Isle of Wight.

Q32: If we implement the change above, which option for setting the lower limit do you prefer?

There should be no lower limit, as explained in answer to Q30. Of the options outlined in the consultation paper, the County Council would prefer that the existing limit is retained (option ACA5) in preference to moving the limit up to the authority with average wage pressures.

Additional Resource Equalisation

Q33: Do you think we should increase resource equalisation?

No. There is no case for any additional resource equalisation. As the Government's figures in the table in paragraph 258 of the consultation paper show, spending by local authorities is less, not more, than FSSs in total, based on the latest outturn data available. There is no justification for any resource equalisation uplift, or worse for cherry-picking the above-FSS spending on personal social services, police and fire, and ignoring the below-FSS spending on highways maintenance and capital financing. This suggests that in tailoring its resource equalisation proposals, the Government is focusing on which authorities gain or lose.

The resource equalisation changes introduced in 2003/04 diverted grant away from the shire counties, particularly those in the South East, to authorities in the North. A similar pattern is evident in the latest proposals, with London also a beneficiary. Shire counties are the main losers and yet they account for the major part of the above-FSS spending on social services, in part as a result of the formula changes in 2003/04. This forms a vicious circle of grant losses from changes to the personal social services FSS, leading to above-FSS spending, leading to further grant losses because of resource equalisation.

Q34: Which of the options do you prefer?

There should be no further resource equalisation but if the Government insists on forcing through such iniquitous proposals, the least damaging option of `half additional' resource equalisation (option RE2) should be adopted. But that should not be interpreted as a positive vote for option RE2 or any other form of resource equalisation.

Floor Damping

Q35: Do you consider that the capital adjustment should be abolished?

Yes. The capital adjustment has a minimal impact and its abolition would simplify the floors methodology.

Q36: Which approach for paying for damping do you prefer (i.e. the existing method, DMP2 or DMP3)?

The Government should provide additional funding to pay for the floor without top-slicing existing grants.

If the Government insists on requiring other local authorities to pay for the floor, the existing method of scaling back authorities' grant increases on a percentage basis is preferred. This proportional basis is the most equitable with the authorities that benefit from the largest grant increase contributing most to funding the floor.

Scaling by taxbase (option DMP2) penalises areas with relatively high taxbases such as Hampshire. It is also technically unsound to pool the four existing floor calculations, each of which has different floor levels. It could lead to education and social services authorities, say, subsidising the much more expensive damping regimes for police and fire authorities and shire districts. Authorities' scaling losses would also be affected by the unaccountable use of ministerial `judgement' in setting Assumed National Council Tax (ANCT) shares for each class of authority.

Scaling by reducing the basic amount per head by a flat rate amount (option DMP3) would penalise authorities whose grant increase is only marginally above the floor. Their grant increase above the floor would be eliminated whilst those authorities with larger grant increases would suffer less significant losses in relative terms. The exemplification appears not to distinguish between county councils that provide fire services and those that do not (such as Hampshire), which may be a technical fault in the methodology.

Day Visitors

Q37: Would you prefer us to use the new day visitors indicator?

Yes. The more recent data used in the new indicator, together with the lower threshold for the exclusion of local trips (from 20 miles to 10 miles) is an improvement.

i:\ . . . . \ian\docs\fss rgd consultation Cabinet 26Sep05 report1.doc 16 September 2005