Oral statement to Parliament

Local government finance 2011 to 2013

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

With permission, Mr Speaker, I should like to make a statement on finance for English local authorities for 2011 to 2013. The spending review…

With permission, Mr Speaker, I should like to make a statement on finance for English local authorities for 2011 to 2013.

The spending review set out how the Government would tackle the catastrophic levels of public debt by delivering necessary reductions in public spending to accelerate deficit reduction and put the public finances back on a sustainable footing. This has involved difficult, but essential and responsible, decisions. Every part of the public sector needs to do its bit to help to reduce the highest deficit in the UK’s peacetime history and the rapidly rising national debt that this Government have inherited.

Last year, the Government borrowed one pound in every four they spent. That threatened our economic credibility. In contrast, our plans to eliminate the current structural deficit over five years have won the backing of the International Monetary Fund, kept our credit rating steady and held interest rates down. The Office for Budget Responsibility’s forecast confirms we are taking the right steps. Its message is that Britain’s recovery is on track.

I have sought to achieve a fair and sustainable settlement for local government by listening to what the local government community has asked for. It will be a progressive settlement that is fair between different parts of the country. First, we have focused on the most vulnerable communities with significant social challenges. These are often the areas that are most reliant on Government grant, so equal grant reductions would leave the poorest places worst off. We have insulated them by giving more weight to the levels of need within different areas and less weight to per capita distributions. We have also grouped councils into four bands, reflecting their dependence on central Government. More dependent places will therefore see proportionally lower falls than more self-sufficient places.

Secondly, we have listened to concerns about the front-loading of the reductions. The Local Government Association asked me to focus on local government total spending, including not just grants but income from council tax and NHS funding to support social care and benefit health. It said that reductions in spending should be limited to 8 per cent. As far as possible, I have given the LGA what it asked for. I have made sure that no authority will face more than an 8.9 per cent reduction in spending power in either 2011-12 or 2012-13. In fact, the average reduction in spending power for 2011-12 is 4.4 per cent. To fund this, I have transferred an extra £30 million of my Department’s budget to local government for 2011-12. I have also provided a grant of £85 million for 2011-12 and £14 million for 2012-13 to fund councils who would otherwise have seen sharper falls.

The spending review also announced that the Government will protect the public from excessive council tax rises. We have set aside £650 million so every council can freeze council tax next year without hitting local services. We will provide councils that freeze council tax with the equivalent of a 2.5 per cent increase in funding instead. That will provide real help to hard-working families and people on fixed incomes, such as pensioners. The Government also want to ensure that council tax payers are protected against authorities that reject the offer and impose excessive council tax rises. We will introduce powers for residents to veto excessive council tax increases through a local referendum. In the meantime, the Government will take capping action against councils that propose excessive rises.

When the House debates the final local government finance report next year, I will set out the capping principles. I will also publish shortly details of the figures that will be used to compare authorities’ budgets between years, should capping be necessary. The previous Government had planned to cap the police authorities of Greater Manchester and Nottinghamshire after they set excessive increases in 2010-11. Subject to challenge, we will ensure that, should they decide not to freeze the council tax, neither can impose an increase of over 2.5 per cent in 2011-12.

This settlement also supports the Government’s commitment to adult social care, providing councils with sufficient resources to protect people’s access to care and to deliver improved quality of outcome. That includes £150 million of NHS funding in 2011-12 to support social care services, promoting integrated working between primary care trusts and local authorities and benefiting the health system. The settlement directs more formula grant to authorities that deliver social care.

Despite all the actions we have taken, I recognise that local government still faces significant challenges. The vast majority of councils have been making sensible plans to address them. I support that and I am restoring real power to councils, ensuring that Whitehall interference, red tape and the burdens of inspection and regulations are gone. The Localism Bill, published today, will deliver a new democratic settlement to local councils, overturning decades of central Government control.

For too long, councils have been barred from using their initiative and creativity to improve services. The limited “power of well-being” acted as an obstacle to cost savings, such as mutual insurance companies. Today’s Bill will fundamentally change councils’ freedom to act in the interest of their local communities through a new general power of competence. That will give councils the legal reassurance and confidence they need to innovate, drive down costs and deliver more effective services. I am also giving councils greater control over their budgets.

With very few exceptions, we have ended grant ring-fencing so that councils can decide for themselves how their money is spent. We will also allow them to borrow against future business rates receipts. Councils now have the freedom and responsibility to concentrate on what residents want: protecting front-line services. To support them, I have set aside £200 million to help councils to modernise and reduce back-office costs.

Councils can protect front-line services by sharing services and back-office functions, improving procurement to get more for less, bringing increasing senior pay under control and using transparency to cut waste. Proactive councils are already taking the opportunity radically to rethink and transform their services. There are also substantial incentives available for councils to invest in long-term projects, which include the new homes bonus and £1.4 billion of regional growth funds over three years-a fund that goes well beyond the working neighbourhoods fund. There will now be a statutory consultation on the settlement for 2011-12 and I look forward to hearing representations from councils.

Finally, this is a transitional settlement, using an inherited system. That is why I have set out details only for the next two years to strike a balance between the need to help councils plan and the need to reform the system. This system, based on redistributing business rates, makes councils heavily reliant on handouts from central Government-some depend on us for up to 75 per cent of their spending power. It is part of the trend that has led to some areas of the country becoming completely dependent on the public sector. It makes planning difficult, weakens local accountability and stifles local innovation. There is no incentive for councils to invest in their local economy as they will see most of the proceeds disappear.

That is why I have set up a review of business rates with the intention that, in future, local government will be able to keep more of what it collects. Ultimately, the councils that invest and support the local economy will be able better to use the finances themselves. The local government resource review will begin in the new year. I commend the statement to the House.