Local Government Finance Settlement Briefing

Introduction
Following a consultation published in December 2015 on the provisional Settlement, the Department for Communities and Local Government (DCLG) published the final local government finance Settlement: England, 2016 to 2017, the annual determination of funding to local government, on 8 February 2016.

This briefing is designed to provide Northern Housing Consortium members with information on how the LG Settlement has changed over the ten year period from 2006/07 to the 2016/17 financial year. The indicative Settlements up to the end of the current parliament (2019/20) will also be explored. The data in this briefing will not include an analysis of allocations to Fire Authorities, rather allocations to upper and lower tier councils are analysed. As the analysis explores different local authority types dating prior to the local authority restructure of 2009, a 2006/07 proxy for the new unitary authorities was created by aggregating former district and a proportion of shire county grants.

Background
The total value of grants to local authorities in England was £17,966million. Services are divided into five groups reflecting the division of responsibilities for providing services in some non-metropolitan areas: some services are provided predominantly by district councils (‘lower-tier services’), others by county councils (‘upper-tier services’), and others by fire and rescue authorities (‘fire and rescue services’). The fourth group of services covers those services other than policing services and fire and rescue services provided by the Greater London Authority and its functional bodies. The fifth group of services covers the notional policing element of the council tax freeze grant legacy payments included within the Local Government Finance Settlement. Different percentage reductions to core funding are applied to each group of services, reflecting the pressures on those services. The upper-tier element is calculated for the following classes of authority: non-metropolitan district councils which have the functions of county councils, county councils, London borough councils, Common Council of the City of London and metropolitan district councils.

The funding lines included in the Settlement are:

  • Settlement Funding Assessment: this is made up of retained business rate revenue, which is then subject to either a ‘tariff’ (a subtraction) or a ‘top-up’ (an addition), and Revenue Support Grant. The tariffs and top-ups are a system of redistribution between wealthier and more deprived local authorities;
  • New Homes Bonus funding: local authorities receive an extra sum of money for each new house completed in their area;
  • Improved Better Care Fund: this consists of additional funding to be used to contribute towards extra spending on social care. Local authorities will also be able to raise council tax to contribute towards greater spending on social care. Allocations of funding under the Better Care Fund will take into account each authority’s capacity to raise council tax;
  • Rural Services Delivery Grant: a non-ringfenced grant to authorities in the highest quartile of ‘sparsity’, recognising the extra costs of delivering public services in rural authorities

The final Settlement 2016/17 confirmed that core government funding to councils, Revenue Support Grant (RSG) would reduce by 28 per cent (£2.7 billion). Government proposed a new methodology for allocating reductions in RSG to take into account councils’ ability to raise income through council tax. In effect, the new system now accounts for the differing extent to which councils rely on grants, locally retained business rates and council tax, making reductions smaller than they would otherwise have been to those that are more reliant on the grant as a proportion of their total income. As a result, local authorities able to raise more of their own revenue from council tax will receive bigger grant funding reductions than they would have received under the previous methodology. The Government has provided additional funding in the form of a transitional grant of £150 million in both 2016/17 and 2017/18 for councils that were most adversely affected by the change in the distribution of RSG. The reduction is based on an assumption by the Government that the council tax base will continue to grow at the same rate as it did from 2013/14 to 2015/16. New Homes Bonus will be outside this process and unchanged.

The Secretary of State announced that he would conduct a review of needs. This will dovetail with the introduction of 100% business rates retention (which the Secretary of State strongly implied to be in 19/20) and could be used as a transition mechanism earlier.

Recognising that council services in rural areas face extra costs, the Secretary of State proposed in the provisional Settlement that the Rural Services Delivery Grant (RSDG)  should be increased from £15.5million to £20million in 2016 to 2017 and to £65million in 2019 to 2020. However, after the consultation period, the RSDG is to increase to £80.5m in 2016/17.

Geographical analysis
The total value of the Settlement coming to the three northern regions is £5,470.64million. This equates to 30.4% of the total England figure. Notwithstanding this, the North East, North West and Yorkshire and the Humber are three of only four regions that have seen a decrease in their Settlements on 2006/07 – London having seen a significant reduction in their grant.

Table 1: Regional allocation

  Settlement Funding Assessment (£m) % change
2006-07 2016-17
East Midlands 1265.32 1287.34 1.7%
East of England 1187.17 1242.64 4.7%
London 5740.28 4555.10 -20.6%
North East 1103.00 1078.99 -2.2%
North West 2643.36 2640.06 -0.1%
South East 2003.65 2132.74 6.4%
South West 1285.61 1331.76 3.6%
West Midlands 1908.44 1945.78 2.0%
Yorkshire and The Humber 1821.31 1751.58 -3.8%

Yorkshire and the Humber (-3.8%) was the hardest hit of the northern regions, while the North East saw a reduction of 2.2% and the North West, 0.1%. In total, £97million was lost to the North over this period.  In terms of regional share of the total Settlement, all regions outside London benefitted at London’s expense to a greater or lesser extent. London’s share fell by 4.9%. As table 2 shows, the South East benefitted most (+1.3%), whilst Yorkshire and the Humber’s share of the total Settlement grew by only 0.1%.

Table 2: Share of Settlement by region

Share of England Total Change in share
2006-07 2016-17
East Midlands 6.7% 7.2% 0.5%
East of England 6.3% 6.9% 0.7%
London 30.3% 25.4% -4.9%
North East 5.8% 6.0% 0.2%
North West 13.9% 14.7% 0.8%
South East 10.6% 11.9% 1.3%
South West 6.8% 7.4% 0.6%
West Midlands 10.1% 10.8% 0.8%
Yorkshire and The Humber 9.6% 9.7% 0.1%

Typically urban authorities derive a greater proportion of their funding from central grants due to having greater social and economic needs, and so receive larger sums of deprivation-targeted grants. It is perceived that county and district councils tend to have fewer deprived areas and so receive small amounts of grant. Table 3 below shows the level of grant for different authority type and how these compare with 2006/07 grants.

The table shows that metropolitan authorities received the greatest proportion of the total grant (26.4%), followed by shire counties (22.7%) and unitary authorities (21.1%). The data also shows that the shire county allocation is the result of a significant increase on the 2006/07 figures. This is despite there being fewer shire counties post 2009. All other types of council with the exception of unitary authorities (+4.1%) saw a reduction in Settlement.

Table 3: Settlement by Authority Classification

2016/17 Settlement (£m) % of total Settlement % change on 2006-07
Shire County 4085.33 22.7% 29.7%
Shire District 789.80 4.4% -47.9%
London Borough 3398.55 18.9% -7.5%
Metropolitan District 4751.58 26.4% -3.4%
Unitary Authority 3784.20 21.1% 4.1%
GLA 1156.56 6.4% -44.0%

Maps 1a and 1b below illustrate which district authorities and which shire counties have seen an increase and which have seen a decrease in their Settlements between 2006/07 and 2016/17. Map 1b shows that Cambridgeshire was the only shire county that saw a fall in grant (-0.9%). All three shire districts in the North (Cumbria, Lancashire and North Yorkshire) benefitted by an increased Settlement.

Despite this, all shire districts in the country saw a decrease in their Settlement. Furthermore, Map 1a shows that only eight of the 36 metropolitan districts nationally (22%) received a higher Settlement than in 2006/07 (six of these were in the North). However, unitary authorities fared better with 39 (70% of the total) having a higher Settlement. Only 13 of these were in the North, however.

District change 2006/07 – 2016/17

District change 2006/07 – 2016/17

 

County change 2006/07 – 2016/17

County change 2006/07 – 2016/17

 

Per Capita
Since 2006/07, the population of England has risen by more than 3.5million people and the Settlement to local authorities has fallen by £990million over the same period. As a result, the Settlement represents a change in spending power from £373.43 per person in 2006/07 to £300.76 per person in 2016/17.

Table 4 below shows how the per capita allocation has changed in the regions over the last ten years. London’s relatively large population growth (over 1million) and disproportionate fall in Settlement, has resulted in a per capita reduction of over £230.

Table 4: Settlement per capita

Per Capita Settlement (£)

Change on 2006-07

2006-07

2016-17

East Midlands

289.93

277.60

-12.33

East of England

211.75

206.47

-5.27

London

764.11

533.47

-230.64

North East

431.58

412.03

-19.55

North West

385.71

370.12

-15.59

South East

243.23

240.34

-2.88

South West

250.57

245.56

-5.01

West Midlands

355.61

340.57

-15.04

Yorkshire and The Humber

354.17

326.79

-27.39

In the North, Yorkshire and the Humber councils are worse off by an average of £27.39 per person. In the North East, that figure is £19.55 and in the North West, £15.59. All regions saw a per capita decrease but in comparison to London and the North, some areas the fall was by as little as £2.88 (South East) and £5.01 (South West).

The North West authorities of South Ribble (£28.92) and South Lakeland (£28.98) have the lowest per capita Settlement in the North. Meanwhile, Liverpool (£573.17) and Blackpool (£539.82) have the highest per capita Settlement.

Offer for future years
Responding to a local government request, the Secretary of State set out indicative figures to allow councils to apply for a 4 year budget, extending to the end of the current Parliament in 2019/20. This was designed to allow councils to formulate ways to translate this greater certainty into efficiency savings. Giving councils the option of longer-term funding Settlements is significant and is seen as an important step towards the financial certainty councils need to run high quality services.

The Government forecasts the total funding available for council services to be broadly similar in 2019/20 as it is now. However, by 2019/20, indicative figures show that the LG Settlement to local authorities will be £13.9bn – a 22.3% fall on the 2016/17 Settlement. All local authorities will see a reduction in their Settlement on 2016/17 figures with the exception of the Greater London Authority (3.6% increase) and the Isles of Scilly where there will be no change. The combined indicative Settlement for the three northern regions stands at £4.3bn, a fall of 21.2%.

The cost pressures, and reductions in the first two years of the Settlement, will mean that many councils will still need to find savings elsewhere, make significant reductions to meet funding gaps and may have to ask residents to pay more council tax. Indeed, allowing councils the flexibility to raise Band D council tax by the maximum of £5 or two per cent will help mitigate some of the additional funding pressures they face in 2016/17 and beyond.

Conclusion
The offer of four-year funding Settlements, with council tax and localised business rates playing a more important role than RSG is a positive development. In the longer term, local authorities will hope that the move to full business rates retention is done in a well-considered and collaborative way and the presentation of the Settlement still includes the rather optimistic assumption that council tax base growth will be about 2% per year, however. Furthermore, with the ending of the transition grant the recipients will face sharp funding cuts in 2018/19.

The publication of the final LG Financial Settlement shows that the majority of lower-tier authorities have seen a reduction in the Settlement they have received from DCLG as Government continues to address the deficit. However, most shire counties and many authorities providing upper-tier services have seen their allocation of funds increase on their 2006/07 figures.

This and the indicative figures to 2019/20 suggest that local authorities will continue to face severe pressures on their budgets and therefore on the services that they provide to their residents.

Briefing Prepared by
Barry Turnbull, Policy Services Officer
barry.turnbull@northern-consortium.org.uk