Settlement fallout part 2: yet more pessimism required
0We’ve all been grappling with the different components of the government’s new funding regime. Under the old regime it was pretty simple: the split of how each council’s needs-based grant was actually funded by government appeared fairly arbitrary. Part of it was re-distributed NNDR and part of it was revenue support grant but increasingly over time the actual make up and balance between the two components was not that important, the grand total was more important.
In the financial reforms undertaken by the current government the components are much more important because they are being treated in different ways.
With one component, New Homes Bonus, the figures are easy to understand, it’s been in place for three years, all of us can estimate what we are getting, so let’s put it to one side.
The other components of government grant are now the spending baseline and newlook RSG. The spending baseline is linked with the new business rates regime and says how much each council needs to retain of all the business rates it collects in order to deliver services. It is index-linked to the multiplier of business rates so in a sense is future-proofed. That amount of money will be fixed and – if anything – go up over time as business rates are uplifted each year by a multiplier which is usually along the lines of RPI, so that should be fairly safe.
The government has announced it will still be paying RSG but it will be different to the old RSG: it will make up the balance of what government needs to pay to councils. Now although the government hasn’t said it is going to go down to zero, the reduction between 13-14 and 14-15 RSG is so great and all the language that the government uses implies that it is going to keep going down over coming years. So there is a very real possibility that it will go down to zero over some point in the next ten years. That is what myself and other senior finance officers here believe. Possibly it could even be within five years.
So it seems to be a balancing figure, but with a long-term vision from the government of getting it down to zero. The spending baseline for my two councils, which is the safe-ish bit, is much less than previous year’s grant. This year we have looked at the spending baseline amount, added the RSG to it (but excluded New Homes Bonus because that was always supposed to be separate) and compared that to what we built into our medium term plan and actually we have been fairly close. I am proud of the fact that I’m more pessimistic than a lot of treasurers I know. So we built a lot of pessimism in and that has come true.
But you have to look at the other impacts of the new regime on government grant and government grant-related elements of every council’s budget. With business rates is your council going to recover less or more than its baseline? If you get more than the baseline you are going to be able to keep some of it as profit but if you get less than the baseline you’re going to suffer a financial loss and you might even be at safety net, which is the maximum loss you can suffer before the government picks up the tab.
One of my two authorities is going to be below safety net, so will suffer maximum loss, and the other is halfway between safety net and baseline, so a medium loss. Those two losses need now to be factored in, we hadn’t factored them into last year’s medium term financial plan.
There is another weird anomaly for districts around council tax overpayment. The way the council tax benefits scheme used to work is that if you were very good at your overpayment recovery you could end up making a profit out of council tax benefit. That might be one of the reasons the government wanted to change the system and I wouldn’t blame it for that. Nevertheless, because you get subsidy for the benefit you pay out but you can also recover some of the overpayment and get subsidy for it if you are very good at recovering overpayments, you could get this profit. My councils were making a profit of a few tens of thousands a year and now that CTB has been scrapped we can no longer make that profit. I’m not complaining about it but it is a financial impact, we hadn’t built it in.
So when you take into account those two adjustments as well as pure government grant money both my councils are worse off than we had built into the medium term plan (not so proud!).
I worry that there are other districts who were more optimistic than us who have had a real ‘oh, damn,’ moment. I think most councils are worse off for years one and two in the settlement than they had built into their MTFPs.
But it’s not just the six figure pressures that both my councils are facing in the first two years though. We can survive those, but it leads to what happens in year three, four, five, where government hasn’t given us any settlement. Just looking at the 23% reduction of RSG between 13-14 and 14-15 (years one and two) the inevitable question is: do you just assume that is a one-off? A huge great reduction in grant but then everything will get rosier afterwards? Or do you think it is going to get worse? Or do you take the probably most pragmatic route, which is to assume 23% reductions every year? I don’t think any council has yet been that pessimistic.
We’re having that argument between finance officers internally now. One is saying but surely it can’t be that bad and I’m saying, well it has been that bad. The government is telling us that the recession is deeper and longer than we thought, national debt isn’t being paid off as quickly as we wanted it to be, so there’s more pain on the way. With all of that language around the edges I can’t believe the government is going to pump more money into district councils. If anything, it is going to take more out.
So as a Section 151 officer I would like to take out 23% each year, because that is what we are faced with. But as soon as I go to the politicians I am going to be faced with the ‘can’t be that bad’ attitude. It will come down to the same old argument between officers and members with us trying to be more prudent (pessimistic) and them trying to be more optimistic.
For any council, if the S151 officer is as tough as they should be but they can’t persuade their councillors of their view, then they have to, by statute, present a report when budget is presented to council. This report is on the accuracy and reality of estimates and sustainability of balances within the time period that has been set. And that S151 officer would have to do what they’ve never had to do before which is to say, ‘I don’t think this is a sustainable medium term position’. Now you’d have to be really, really brave to do that, but as I said last week, that is what we are paid to do.
Steve Bishop is Strategic Director for South Oxfordshire and Vale of White Horse District Councils
