Appendix

Ms Nikki Hinde

Communites and Local Government

Zone 5/H3, Eland House

Bressenden Place

LONDON

SW1E 5DU

Dear Ms Hinde

1

Revenue Support Grant for 2007/08 and Related Matters

The County Council's Cabinet considered the Government's proposals for the Revenue Support Grant settlement for 2007/08 at their meeting on 18 December 2006. They asked me to make the following response to the consultation.

Overall settlement and grant floors

The County Council is disappointed that the Council's formula grant will increase by only 2.7% in 2007/08. This does not cover inflation, let alone meet the additional demands for services such as adult and children's social care and waste management.

This low increase in formula grant is even more damaging because it follows an increase of only 0.2% in 2006/07, after taking account of the Government's abolition of the grants for safeguarding children and access and system capacity. In addition, the County Council's grant for Supporting People for 2007/08 has been frozen at just below the level for 2006/07.

Together these grant allocations for 2007/08 are not sufficient to meet the rising costs and open-ended demand for adult care and children's services and the higher costs of dealing with household waste or increased demand for any of the County Council's other services. Even after making ongoing efficiency savings, the Council faces a stark choice of cutting services whilst asking council tax payers for the maximum increase in council tax permitted by the Government's threats of capping limits.

Whilst the County Council is committed to keeping within the lowest quartile of the council taxes levied by county councils in England, it is unreasonable for the Government

to provide a grant increase of only 2.7% and expect the council tax increase to be kept within 5% without serious consequences for services. The County Council opposes the imposition of capping limits in this way and urges the Government to use the forthcoming report of the Lyons Inquiry into Local Government as an opportunity to abandon its reserve capping powers.

Ministers have drawn attention to a 39% real terms increase in funding for local authorities nationally since 1997/98 but, over that period, spending has had to increase by 50% in response to the Government's spending plans and service pressures. According to research by the Local Government Association, funding from the Government for services other than schools and other specific grant funded Government priorities has increased by only 14% in real terms, compared with a 90% increase in the National Health Service. Local government in general, and Hampshire County Council in particular, has not had a fair deal from the Government.

Twelve months ago, the Government promised to work with local authorities to take action on spending pressures including those arising from new burdens, pay and pensions, adult social services and waste management. No tangible benefits of this promise are apparent in the grant settlement for 2007/08, which is disappointing. Those pressures are real and are here now. If the Government is deferring action until next year's Comprehensive Spending Review, it is essential that local government services receive a significant uplift in funding so that they are placed on a proper financial footing for the future.

Grant floors

The extent of damping within the County Council's grant settlement for 2007/08 represents a major risk in the County Council's medium term financial strategy, with the uncertainty about when the damping regime will be unwound.

In addition to £23m provided by the general grant floor in 2007/08, a further £15m of the County Council's formula grant is dependent on the damping arrangements in the formulae for children's and younger adults' services.

Altogether £38m or 30% of the County Council's formula grant for 2007/08 of £123m is at risk and this undermines some of the certainty provided by multi-year grant settlements. I welcome your colleague Amer Shoib's comment in his letter to me of 9 February 2006 that the grant floor should be regarded as a permanent part of the formula grant allocation system. The County Council asks for confirmation that this commitment still stands and that the £38m of formula grant will never be taken away from the County Council in any future grant settlement.

Four block model

The County Council urges the Government to abandon the four block model used to distribute formula grant to local authorities. Its lack of transparency and increased complexity has resulted in a local government finance system that is even more difficult to explain to council tax payers and other stakeholders.

The model's lack of credibility, along with the underlying formulae, is brought into sharp focus by the extent of damping required in the County Council's grant. The basic methodologies are so unfit for purpose that an overlay of an additional 30% of damping grant is required to deliver even the wholly inadequate increase in grant for 2007/08 of 2.7%.

In particular, the County Council urges the Government to commission fresh research into the relative needs formulae for children, older people and younger adults personal social services. These formulae are based on inadequate research using limited and unrepresentative data samples.

Funding for deprivation

The Government should also reduce the funding for deprivation within all the relative needs formulae. Providing adequate funding for the basic needs of services in all areas should take priority over funding unmet needs in areas with higher levels of deprivation. The basic amounts should be funded in full in the first instance with any residue, only, used to fund deprivation costs. Such costs are already heavily subsidised by specific grants including the Neighbourhood Renewal Fund.

Schools funding

The County Council also asks the Government to reverse the transfer of funding for schools from general formula grant to the ring-fenced dedicated schools grant (DSG), which was introduced in 2006/07. The switch to DSG has increased the proportion of the Government's revenue support for local authorities provided as ring-fenced specific grants to over 50%, contrary to the Government's previous commitments to reduce the proportion.

Waste management

The County Council believes that the Government should introduce a separate relative needs formula for waste management costs, to be allocated according to resident population. An overwhelming case for a separate waste formula, in terms of the size of spending and its distributional impacts, was published in research by the Society of County Treasurers.

The County Council also urges the Government to accepted that the Council's private sector contract for waste management services should be recognised for grant support, either through the capital financing relative needs formula or the specific grant for the private finance initiative (PFI) schemes. The County Council's contract pre-dates the Government's introduction of funding arrangements for PFI schemes but it has the characteristics of a PFI scheme.

Area cost adjustment

The County Council is disappointed that the Government continues to link Hampshire with the Isle of Wight for area cost adjustment (ACA) purposes. There is no justification for artificially reducing Hampshire's ACA factor, and therefore its grant, simply to direct grant to the Isle of Wight to reflect its higher costs as an island, despite its lower wage levels.

The County Council urges the Government to end this link in the final settlement for 2007/08, as had been proposed in the options published in the review of formula grant distribution in July 2005.

Capital adjustment in the floor damping mechanism

The Government's abolition of the capital adjustment in the general grant floor damping calculation has resulted in the County Council, as a floor authority, receiving no additional revenue grant towards debt charges arising from `Government supported' borrowing allocations. The County Council is disappointed that the Government has not responded to widespread pressure from local government to reconsider this change.

Without the additional revenue grant, the cost of servicing such borrowing at the margin falls directly on the council tax payer. Reluctantly, the County Council has had to decide not to take up part of the borrowing allocations for 2007/08 in order to limit the effect on the council tax. This particularly affects the borrowing allocations for capital expenditure on schools and the local transport programme.

The County Council urges the Government to reinstate an effective capital adjustment in the floor damping mechanism or provide all its support for capital investment as capital grant from 2007/08 onwards.

Comprehensive Spending Review

The County Council considers the issues raised in this letter to be urgent and significant. Action is required by the Government in 2007/08 if the impact on services and the council tax is to be mitigated.

If the Government insists on ignoring these effects in 2007/08 in order to maintain its two-year grant settlement, it is essential that the Government uses the opportunities provided by the Comprehensive Spending Review and the Lyons Inquiry into Local Government to introduce the changes required in 2008/09.

Further information

Please let me know if you require further information. I look forward to your positive response to the specific points raised in this letter.

Yours sincerely

Jon Pittam

Copies to:

Hampshire MPs

Local Government Association - Paul Rigg and Mike Heiser

County Councils Network - Caroline Cunningham

Somerset County Treasurer's Department - Tim Richens

Hampshire & Isle of Wight Local Government Association - Nick Goulder

Cabinet

Councillor A.P. Collett

Councillor Jo Kelly