Richard Harbord: The difficulties of fiscal neutrality

As Local Authorities finalise their accounts it is no surprise they turn their minds to the next financial year. For many authorities this will fail to bring any joy, or relief, from the burden of austerity.

And when the the past year’s figures are eventually published it will be fascinating to see whether the majority managed to end the year within their original budgets.

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8th Local Authority Treasurers Investment Forum
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I suspect there may be fewer for 2015-16 and I also suspect that non-earmarked reserves will not have risen.

But, of course, they now turn to 2017-18 and the inevitability of yet more “savings” to balance the books.

Brave new worlds

This summer will bring the discussion papers on the 2020 changes to financing local government – the brave new world where authorities will no longer rely on central government grant to finance services as business rates are fully devolved.

It has been confirmed that the changes will be fiscally neutral although that is not an idea shared by local authorities and central government alike.

The Chancellor is clear that local authorities receiving the full quantum of business rates will also acquire

sufficient new services, or diminished specific grants, to ensure that the central coffers pay no more in total in local government support.

Local authorities, meanwhile, are keen to ensure that any new burdens are not included and that they receive sufficient additional funding to cover them.

For instance although the Local Government Association believe that it is almost inevitable that local authorities will take on Attendance Allowance, this should not happen without additional funding to match.

Slicing the cake

The difficulty about all this is how the funding cake is sliced in order to meet the unequal needs of local authorities. This is the objective of the sub group of the joint DCLG/LGA steering body, a group that is bound to toil away for a considerable time before it is able to reach a conclusion.

It will of course be complicated and the end result will inevitably fail to please all. It is the first really comprehensive review of needs for many years.

The original revenue support grant was based on a complicated regression analysis which tried to bring together as many as 50 measures of need. Each year it came with its own industrial effort to re-negotiate the measures.

Simples

Already there has been talk of a simple solution. The trouble is how accurately you wish to measure the needs of local authorities comparatively?

In the past simple solutions were seen as being rough and ready, not fair to all. To be equitable to all authorities needs a comprehensive solution which simply may not be possible.

How anyway do you measure need? A suggestion was that the starting point should be an analysis of historic budgets. But does this in anyway measure need, or does it just measure the outcome of pragmatic spending decisions drawn up to meet available resources?

In addition the picture is complicated by the business rates debate, which is difficult because of the piecemeal nature of devolution deals, many of which have allowed authorities to retain 100% of business rates already.

Interestingly the National Audit Office, in its study of devolution funding could find no common thread in the way they had been calculated. The NAO said that “deals agreed did not give a clear view of the landscape or, crucially, the destination.”

One of the other interesting things that will come out when the detailed budget statistics for 2016-17 are published is the degree that authorities have provided for the outcome of business rate appeals.

Anecdotal evidence is that there are huge variations in the risks taken by authorities in this area.

There is also a feeling that central government should shoulder some of the retrospective payments made on appeals and indeed many argue that to remove this whole area of uncertainty central government should underwrite losses on appeal entirely. I think that will be difficult within a regime of fiscal neutrality.

Richard Harbord is a consultant and a former chief executive of Boston Borough Council.