Funding outlook for councils from 2010/11 to 2019/20: Technical annex
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Methodology and assumptions Methodology This section explains the methodology used to prepare the new Local Government Association (LGA) ‘Future funding outlook’ model 2013. The majority of base data on the financial positions of councils was taken from Department of Communities and Local Government (DCLG) finance statistics. Key data sources include: • 2010/11 Revenue Outturn (RO) • 2011/12 Revenue Outturn • 2012/13 Revenue Account (RA) • data from the 2013/14 settlement and 2014/15 provisional settlement. A full list of data sources is provided at the end of this document. The model calculates the individual position of each council based on a number of assumptions and cost projections and then aggregates each individual case up to provide a national picture. Funding assumptions The model projects the likely path of council revenue, based on a number of assumptions. Council tax: Figures for 2010/11 and 2011/12 are taken from the RO, for 2012/13 from the RA and for 2013/14 from DCLG council tax levels. We have assumed that council tax will increase by 1 per cent in 2014/15 and will thereafter grow by 1.5 per cent per year. 2
Funding outlook for councils
We have also assumed a modest growth in the tax base from 2013/14 that is calculated from the geometric mean of current tax base trends and projected household growth in each local authority area. This works out at an average of 0.4 per cent growth in the tax base in 2013/14 rising to an average of 0.5 per cent growth in the following years. Business Rates: 2013/14 is the first year of the business rates retention system and authorities will need to take account of the new opportunities and risks that this presents. It is too early to say what these will be. Figures for 2010/11 to 2011/12 are taken from the RO, and for 2012/13 are taken from the RA. For 2013/14 onwards the business rates line shows the local share only – this is taken from the business rates baseline information and adds top-ups, tariffs, levy and safety net payments where applicable – in other words it shows the funding baseline. The source is the DCLG headline information for 2013/14 and 2014/15. We have assumed future business rates grow by retail price index (RPI) plus a local growth estimate that combines a two year local trend in rateable value with the 0.3 GDP fan from the OBR predictions. This works out at an average growth of 0.2 per cent above RPI in 2013/14 growing to an average of 0.5 per cent by 2017/18.
Grant funding: Figures for 2010/11 and 2011/12 are taken from RO; for 2012/13 from RA and from the Headline Amounts in the local government finance settlement for 2013/14 and 2014/15. Overall local government funding is reduced in 2015/16 by 10% in real terms in line with the Chancellor’s announcement of 26 June 2013. Other specific grants from CLG specific grant data are either individually listed or combined dependent on size. New Homes Bonus amounts are projected using a rolling average to estimate the current year amount, which is then summed with preceding years up to a total of six years. For 2016/17 and later the grant funding trajectory is based on a calculation of the overall reduction outside the local share, excluding New Homes Bonus. The central assumption is an 8 per cent cut in 2016/17 reducing to a 7 per cent cut in 2017/18 and onwards. Additional funding from the NHS for Adults’ Social Care is assumed to benefit social care authorities by £1.0 billion in 2015/16, rising to £1.5 billion in 2016/17 and each year thereafter. This is distributed on the basis of 2013/14 social care funding allocations. Public health: We have used the public health funding allocation for 2013/14 and 2014/15 and for following years have assumed that the overall level of funding rises in line with consumer price index (CPI) inflation. Investment income: We have used the RO returns for 2010/11 and 2011/12 and RA returns for 2012/13 and thereafter assumed that yield will be responsive to the changes in the market gilt rate. Using CIPFA (Chartered Institute of Public Finance and Accountancy) statistics on local authority assets we estimated that 20 per cent of local authority equity in 2012/13 is derived from the
investment of reserves and so have adjusted that proportion to reflect movement in reserve levels. Transfers to and from reserves: We have used the RO returns for 2010/11 and 2011/12 and RA returns for 2012/13. The model assumes that where a funding gap exists each authority will draw up to 5 per cent of their reserves each year to plug the gap, with the reserve level never going below 5 per cent of total annual expenditure. If the funding level is above predicted expenditure then all surplus will be added to reserves for that year. Expenditure The funding model then projects the path of council spending between 2011/12 and 2019/20 in ten major service blocks: • education (excluding the Dedicated Schools Grant) • social care • highways, roads and transport • housing (not including housing revenue account (HRA) or housing benefit) • culture, recreation and sport • environment including waste • regulatory • planning and development • other services • public health. Net expenditure was split into its four composite parts and then drivers were applied to each as applicable. The four parts to net expenditure are: • employee expenditure • running costs • sales, fees and charges • other income.
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The RA data that forms the baseline for 2012/13 does not include data on fees and charges, so we assumed a consistent level of income from 2011/12 RO forms and used 2010/11 and 2011/12 RO data to provide a split in expenditure categories. We assumed that additional income from sales, fees and charges would be sensitive to prevailing economic conditions and applied a multiplier derived by calculating the difference between CPI and the output gap to market-facing services. Sales, fees and charges and other similar income are treated as reductions to gross expenditure to arrive at ‘net expenditure’ within the model, rather than being treated as a source of funding. This means that an increase in sales, fees and charges would reduce the funding gap by reducing total expenditure rather than by increasing total funding. Spending has been excluded for Fire and Rescue (as a group of single-service authorities with their own precept), Police (for the same reason, as well as reflecting the likelihood that they will continue to receive differential treatment in the Spending Review and future council tax frameworks), HRA and housing benefit spending (as self or separately-funded areas), and schools spending funded by the Dedicated Schools Grant and pupil premium. For each service area, baseline spending has been set using 2010/11 and 2011/12 Revenue Outturn data and 2012/13 Revenue Accounts and projected using the major drivers of cost for those services.
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Funding outlook for councils
Drivers essentially break down into two categories: • drivers of unit cost (e. inflation, pay drift, efficiencies, etc) • drivers of service usage (eg population change, increased traffic miles, etc). The model also builds in efficiency assumptions. In this version of the model, the assumption is uniform for most services: councils start by achieving 2 per cent annual efficiency savings which tapers to 1 per cent by the end of the period. This is increased for central services. It is sensible to assume diminishing returns from efficiency: nearly two-thirds of councils are already engaging in shared service arrangements and over 200,000 jobs have been shed since 2010. Cost drivers in service expenditure This section sets out the primary cost drivers that have been applied to each service area and identifies other factors which are likely to drive costs but which we have not been able to quantify. All service expenditure has, where possible, had local authority level data applied. Education • Expenditure excludes services funded by the Dedicated Schools Grant, Pupil Premium and further education funding. • CPI inflation, Pay Drift and the Office for National Statistics (ONS) projections for child population were applied as cost drivers in the model. • Child population numbers were used rather than pupil numbers because education-related services that are funded from outside the Dedicated Schools Grant have a user base that extends beyond pupils.
• The impact of central government policy decisions, such as an increased number of academies and knock-on effects of any future changes to the schools funding formula, are not reflected in the model. Children’s social care • Health and social care unit costs remain constant in real terms to 2015 and then rise by 2 per cent per year in real terms (but non-labour non-capital costs remain constant in real terms). This follows the approach taken by the Personal Social Services Research Unit (PSSRU) when modelling future social care costs for the Dilnot report. This is intended to reflect key unquantifiable cost drivers such as changes to the length of time spent in care, increase in referrals, use of agency staff, complexity of care needs etc. • Service usage is projected based on the change in child population in each local authority area. • The Children and Family Court Advisory and Support Service also report that there has been a sustained increase in the number of councils applying to the courts for a Care Order since the Baby P case, but the numbers are still too volatile for a trend to be predicted and the average costs for councils leading up to a court application have not been accurately determined. Adult social care • Health and social care unit costs remain constant in real terms to 2015 and then rise by 2 per cent per year in real terms (but non-labour non-capital costs remain constant in real terms). This follows the approach taken by the PSSRU when modelling future social care costs for the Dilnot report.
• Service usage is projected based on the change in either over 65 (for older people services) or working age (for other adults) population in each local authority area. • The impact of changes to the types of care that people receive, Dilnot proposals/ government changes to funding of ASC, changes to NHS spending on reablement and other services and the impact of shortfalls in Disabled Facilities Grant funding have not been applied to the model. Highways, roads and transport • For concessionary fares, CPI inflation, pay drift and the projected increase in people over the state pension age are applied as cost drivers. • For other transport spending, we applied CPI inflation, pay drift and vehicle miles based on the Department for Transport’s (DfT) 2011 Road Traffic Forecasts. Housing • CPI inflation, pay drift and the change in the number of households are applied as cost drivers. • The model includes an adjustment designed to take account of the impact of housing benefit changes and the economic downturn on demand for housing advice, applications for homelessness, demand for Disabled Facilities Grant etc. This is based on a report by the Cambridge Centre for Housing and Planning Research (CCHPR). Culture, recreation and sport • CPI inflation, pay drift and the change in population are applied as cost drivers.
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Environment • CPI inflation, pay drift and the change in population are applied as cost drivers to non-waste management areas. • Inflation, pay drift and the change in households are applied as cost drivers to waste collection and recycling. • Cost of landfill: based on Department for Environment, Food and Rural Affairs (DEFRA) modelling that overall waste arisings will decrease and the amount of waste landfilled will decrease. Landfill tax will remain at £80 per tonne from 2015/16 and landfill gate fees will increase with inflation only.
• Cost of energy from waste (EFW): based on DEFRA modelling that overall waste arisings will decrease, but the proportion of waste arisings sent as EFW will increase. EFW gate fees will increase with inflation only. • Cost of composting gate fees (organics): based on DEFRA modelling that overall waste arisings will decrease and the proportion of waste arisings composted will remain constant. Composting gate fees will increase with inflation only. Planning and development • CPI inflation, pay drift and the change in population are applied as cost drivers. • It also projects that the number of planning applications will stay constant to 2013/14 but will thereafter increase by 5 per cent a year as a result of economic recovery and will climb gradually back to the levels received by councils at the start of the last decade.
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Funding outlook for councils
Other services • CPI inflation, pay drift and the change in population are applied as cost drivers. • The model assumes that councils will continue to target corporate and back office functions to achieve maximum savings, but will reach a point about midway through the decade when they start to see diminishing returns, given the high levels of efficiency savings from these functions they have already realised. The efficiency savings applied to central services are hence double those applied to all other services. • The cost of servicing capital financing costs has also been included as an expenditure item and assumed to stay flat throughout the period. This may be an underestimate since borrowing costs can be expected to return to higher levels over the decade. Although the Office for Budget Responsibility (OBR) does forecast a 1 per cent increase in market gilt rates, higher interest rates will only apply to a small proportion of total local authority borrowing and the resulting cost pressures are not expected to have a material impact on expenditure for councils at a national level. Public Health • As the service only started to be provided by local government in 2013/14 the projected expenditure is the same as agreed funding, increasing by inflation only. This makes it cost neutral within the model.
Summary of cost drivers
Education
Ð Ð
Transport
Ð Ð
Ð
Efficiencies
and charges
Sales, fees
Other
Households
SPA and over
65 and over
Working age
Child
All
Pay drift
CPI inflation
Population
2.8 - 2%
2-1%
2.8 - 2%
2-1%
Maintenance and winter service
Ð Ð
Ð
2.8 - 2%
2-1%
Parking
Ð Ð
Ð
1.1-2.5%
2-1%
Road safety education
Ð Ð
2.8 - 2%
2-1%
Street lighting
Ð Ð
2.8 - 2%
2-1%
Concessionary fares
Ð Ð
1.1-2.5%
2-1%
2.8 - 2%
2-1%
Ð
2.8 - 2%
2-1%
Ð
2.8 - 2%
2-1%
Ð
2.8 - 2%
2-1%
Ð Ð
2.8 - 2%
2-1%
1.1-2.5%
2-1%
1.1-2.5%
2-1%
2.8 - 2%
2-1%
1.1-2.5%
2-1%
1.1-2.5%
2-1%
Social Care
Ð
Children
Ð
Older people
Ð
Other adults
Ð
Housing
Ð Ð
Cultural
Ð Ð Ð
Libraries Environmental
Ð Ð Ð Ð Ð Ð Ð
Ð Ð Ð
Ð
Ð Ð Ð
Waste disposal
Ð Ð
Waste collection
Ð Ð
All other waste
Ð Ð
1.1-2.5%
2-1%
Regulatory
Ð Ð Ð
2.8 - 2%
2-1%
Planning and development
Ð Ð
Ð
1.1-2.5%
2-1%
Planning policy
Ð Ð
Ð Ð
1.1-2.5%
2-1%
Central services
Ð Ð
2.8 - 2%
4-2%
n/a
0%
n/a
0%
Capital financing Public health
Ð
Ð Ð
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References and data sources
2010/11 Data 2010/11 Revenue Outturn (Department for Communities and Local Government https://www.gov.uk/government/publications/local-authority-revenue-expenditure-andfinancing-england-2010-to-2011-individual-local-authority-data--5 2011/12 Data 2011/12 Revenue Outturn (Department for Communities and Local Government) https://www.gov.uk/government/publications/local-authority-revenue-expenditure-andfinancing-england-2011-to-2012-individual-local-authority-data--2 2011/12 New Homes Bonus Allocation (Department for Communities and Local Government) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/6073/ 1880422.pdf 2012/13 Data 2012/13 Revenue Account (Department for Communities and Local Government) https://www.gov.uk/government/publications/local-authority-revenue-expenditure-andfinancing-england-2012-to-2013-individual-local-authority-data 2013/14 Data 2013/14 Headline Amounts (Department for Communities and Local Government) http://www.local.communities.gov.uk/finance/1314/1314headamts.xls 2013/14 Education Services Grant (Department for Education) http://media.education.gov.uk/assets/files/xlsx/e/education%20services%20grant%20 allocations%202013%2014.xlsx 2013/14 Special and Specific Grant Allocations (Department for Communities and Local Government) http://www.local.communities.gov.uk/finance/1314/specgrant1314/index.htm
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Funding outlook for councils
2013/14 Council Tax Benefit Transition Grant (Department for Communities and Local Government) https://www.gov.uk/government/uploads/system/uploads/attachment_data/ file/136402/130222_Transitional_Funding_Schemes_Final.pdf 2013/14 Council Tax Levels (Department for Communities and Local Government) https:/ www.gov.uk/government/publications/council-tax-levels-set-by-local-authorities-in-england2013-to-2014 2013/14 Qualification for Council Tax Freeze Grant (Department for Communities and Local Government) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/172912/ Table_12_text.xls 2014/15 Data 2014/15 Special and Specific Grant Allocations (Department for Communities and Local Government) http://www.local.communities.gov.uk/finance/1314/specgrant1415/index.htm 2014/15 Headline Amounts (Department for Communities and Local Government) http://www.local.communities.gov.uk/finance/1314/1415headamts.xls 2015/16 Funding Projections Spending Round 2013 (HM Treasury) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/209036/ spending-round-2013-complete.pdf Apportionment of additional NHS funding on basis of 2013/14 allocations of adult social care funding: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/127318/ Funding-transfer-from-the-NHS-to-social-care-in-2013-14.pdf.pdf Population and Household Projections 2011 Population projections (Office for National Statistics) http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-270247 2011 Household projections (Department for Communities and Local Government) https:/ www.gov.uk/government/publications/household-interim-projections-2011-to-2021-in-england
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Other Background Data Council Taxbase Statistics (Department for Communities and Local Government) https:/www.gov.uk/government/organisations/department-for-communities-and-localgovernment/series/council-taxbase-statistics Rateable Value statistics (Valuation Office Agency) http://www.voa.gov.uk/corporate/statisticalReleases/120517_CRLFloorspace.html Economic and Fiscal Outlook Tables (Office for Budget Responsibility) http://budgetresponsibility.independent.gov.uk/pubs/March-2013-EFO-charts-and-tables.xls Road Transport Forecasts (Department for Transport) https://www.gov.uk/government/publications/road-transport-forecasts-2011-results-from-thedepartment-for-transports-national-transport-model Local Authority Assets (CIPFA) http://www.cipfastats.net/cipfastats/ Written Reports PSSRU, 2011. Projections of Demand for Social Care and Disability Benefits or Younger Adults in England http://www.pssru.ac.uk/pdf/DP2880-3.pdf PSSRU, 2011. Projections of Demand for and Costs of Social Care for Older People in England, 2010 to 2030, under Current and Alternative Funding Systems http://eprints.lse.ac.uk/40720/1/2811-2.pdf OBR, 2013. Economic and Fiscal Outlook March 2013 http://cdn.budgetresponsibility.independent.gov.uk/March-2013-EFO-44734674673453.pdf CCHPR, 2010. How will changes to Local Housing Allowance affect low-income tenants in private rented housing? http://england.shelter.org.uk/__data/assets/pdf_file/0016/290041/CCHPR_final_for_web_2.pdf DEFRA, 2012. Forecasting 2020 waste arisings and treatment capacity https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181816/ pb13883-forecasting-2020-waste-arisings.pdf.pdf
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Funding outlook for councils
For more information please contact: Alan Finch Head of Local Gorvernment Finance Local Government Association Local Government House Smith Square London SW1P 3HZ Email: lgfinance@local.gov.uk Telephone: 020 7664 3085
Local Government Association Local Government House Smith Square London SW1P 3HZ Telephone 020 7664 3000 Fax 020 7664 3030 Email info@local.gov.uk www.local.gov.uk Š Local Government Association, July 2013
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