November 2013 by Redactive Media Group

PublicFinance

The business monthly of the public sector

publicﬁnance.co.uk

Issue 11 November 2013

NOVEMBER 2013

Damned if they do... Iain Macwhirter on Scotland’s lose-lose independence vote

Quality time Exclusive interview with CQC chief exec David Behan

Tim Harford The Undercover Economist ponders Osborne’s dilemma

HOW REAL IS THE

RECOVERY?

Jonathan Portes on bounce-backs and bubbles

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Vital tools to help you

optimise your HRA business plan Voluntary Code for a Self-ﬁnanced Housing Revenue Account CIPFA has co-written this new code with the CIH to assist you in sustaining the management and delivery of your HRA business plan, and to ensure it is consistent with

existing frameworks.

HRA Self-ﬁnancing Performance Toolkit To accompany the code, we have developed the new toolkit – an essential tool to help you measure and improve your performance in 9 critical areas of the HRA Business Plan. This process will drive your organisation towards optimal delivery of a self-ﬁnanced HRA and help you comply with the code.

For more information on the voluntary code and toolkit visit www.cipfa.org/hra or email varsha.gowda@cipfa.org

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PublicFinance

CONTENTS

November 2013

Features 24 COVER STORY Growing pains With the UK economy recovering, George Osborne claims that his austerity policies have ﬁnally been justiﬁed. Is this analysis correct? Jonathan Portes has his doubts

30 The quality controller The Care Quality Commission is being given statutory independence to avoid political inﬂuence. Chief executive David Behan tells Judy Hirst about speaking truth to power

34 Taking a load off Patrick Nolan says the chancellor is taking a half-hearted approach to deﬁcit reduction. Protecting huge budgets – including the NHS, pensioner beneﬁts and schools – means he is operating with one hand tied behind his back

38 Age of anxiety Until the government takes the impact of an ageing population seriously, what chance is there for the public? Claudia Wood believes that radical reforms are needed

‘WE AREN’T IN A BUBBLE YET, BUT BOOSTING DEMAND WITHOUT INCREASING SUPPLY WILL ENSURE HOUSE PRICES KEEP RISING’

44 Regulars 6

Leader Forever blowing bubbles?

Second Thoughts Tim Harford examines the chancellor’s ﬂawed economic logic

News LGPS reform criticised; PAC chair calls for better governance; concern over New Homes Bonus cut

Need to Know 10

42 43

Cipfa Events

Conference Analysis PF goes to Washington to cover the Mefmi conference of African ﬁnance ministers and central bank governors Opinion Rob Whiteman on town hall traumas and David Hodge on County Deals, plus readers’ letters and online comments

On Account Sustainable accounting

Management Development How to be an expert at managing change in turbulent times

Voice of the Nations Henry McLeish interview

Smart Thinking? John Thornton on learning the lessons of global cyber attacks

20 Restless Nation The lose-lose referendum

Numbers Game

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CONTACTS

Leader Bubble trouble

t looks like growth. It sounds like growth. But – unless you’re a London estate agent – does it feel like growth? This is what George Osborne’s critics are asking in response to all the talk about ‘turning a corner’ and recovery being under way – a narrative we’ll hear much more about in the December 4 Autumn Statement. The doubters have a point. Many of the economic indicators are heading in the right direction. And, much to the chancellor’s delight, the International Monetary Fund has revised its UK growth forecasts upwards. But on the ground, real wage levels are in freefall, with many employees on zero-hours and sub-minimum-wage contracts. Public sector pay is now in decline. Meanwhile, energy, housing and fuel costs have soared. Outside of a few property hot spots, there is precious little sense of a feel-good factor. In fact, as Jonathan Portes spells out (cover feature, pages 24–28), this is the weakest recovery in UK economic history. GDP has grown by less than a third of the rate predicted by the Office for Budget Responsibility in 2010. And short-termist measures such as Help to Buy merely risk stoking unsustainable levels of personal debt. We may not be in a full-blown housing bubble yet, but most economists agree that pump-priming the market to boost housing receipts could easily lead to one. So where does that leave the ‘hard-working families’ the government says it’s so keen to protect? Politicians of all stripes are eager to show they are sensitive to the needs of hard-pressed voters – hence all the offers of mortgage sweeteners, energyprice freezes, free school dinners and marriage tax breaks. However, as the chancellor himself has stressed, it’s the state of the economy that underpins living standards. And with growth so fragile, he’s taking no chances. Osborne’s commitment to achieving a surplus by 2020 is little more than a Treasury mission statement – ‘forward guidance’ to the markets of his intention to forge ahead with a decade of austerity. Growth levels are nowhere near strong enough to make a serious dent in the deficit, so more of the same medicine is all that’s on offer. And as Rob Whiteman argues (pages 14–15), that’s a grim prospect indeed. As for cash-strapped public sector staff and service users, they must be left wondering whatever happened to sharing those proceeds of growth.

■ Judy Hirst DEPUTY EDITOR letterstoeditor@publicﬁnance.co.uk

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REDACTIVE PUBLISHING LTD 17-18 Britton Street London EC1M 5TP 020 7880 6200 www.publicfinance.co.uk Editor Mike Thatcher 020 7324 2768 mike.thatcher@publicfinance.co.uk Deputy editor Judy Hirst 020 7324 2769 judy.hirst@publicfinance.co.uk News editor Vivienne Russell 020 7324 2788 vivienne.russell@publicfinance.co.uk Senior reporter Richard Johnstone 020 7324 2796 richard.johnstone@publicfinance.co.uk Reporter Judith Ugwumadu 020 7324 2794 judith.ugwumadu@publicfinance.co.uk Contributors Jane Cahane, Keith Aitken Chief subeditor Anne Lawton 020 7324 2789 anne.lawton@publicfinance.co.uk Art editor Gene Cornelius 020 7324 6227 gene.cornelius@redactive.co.uk Editorial assistant Tania Forrester 020 7324 2793 tania.forrester@publicfinance.co.uk Digital content manager Harriet Patience 020 7324 2733 harriet.patience@redactive.co.uk Sales manager Katy Eggleton 020 7324 2762 katy.eggleton@redactive.co.uk Digital sales executive Leila Serlin 020 7324 2787 leila.serlin@redactive.co.uk Recruitment sales executive Gill Rock 020 7324 6234 gill.rock@redactive.co.uk Advertising production Aysha Miah 020 7880 6241 aysha.miah@redactive.co.uk Printing Pensord, Blackwood, Gwent, Wales To subscribe to Public Finance at the annual cost of £100, call 020 8950 9117 or email publicfinance@alliance-media.co.uk. Public Finance is editorially autonomous and the opinions expressed are not those of CIPFA or of contributors’ employing organisations, unless expressly stated. Public Finance reserves the copyright in all published articles, which may not be reproduced in whole or in part without permission. Public Finance is published for CIPFA by Redactive Publishing Ltd. Public Finance 17–18 Britton Street, London EC1M 5TP Tel 020 7880 6200 Fax 020 7324 2790

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Tel 020 7543 5600 Fax 020 7543 5700 Email corporate@cipfa.org Address CIPFA, 3 Robert Street London, WC2N 6RL

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Second thoughts pfOpinion

■ Tim Harford

It’s the politics, stupid Forget deficits and growth. The chancellor’s policies are as much to do with politics as economics. It’s a credibility issue What sort of a problem did George Osborne have when he took ofﬁce in 2010? His friends say he had a deﬁcit problem: the government was spending far more than it was taking in in taxes, forcing annual borrowing to record levels. His common-sense solution: raise taxes (which he did immediately) and slash spending (he is working on that). His critics say he had a growth problem: the nation had been shoved into a deep recession by the banking crisis, and deficit spending should have been a major part of the policy mix to reignite growth quickly. One reason the debate seems so intractable is that the deficit problem and the growth problem were two sides of the same coin, yet the policies needed to solve them seemed utterly contradictory. But here’s another way to see the chancellor’s plight: he had a credibility problem. Most people agree that in the medium term, spending cuts or tax rises would have been necessary to keep the UK’s debt under control. Many people believe that doing this during a deep

recession makes that recession deeper. So Osborne’s austerity policies look poorly timed. He should have postponed his plans, which could have boosted growth appreciably while making very little difference to the overall debt picture. Here’s a quick wish list of policies that Osborne should have introduced. First, a gradual VAT escalator: rather than immediately whacking up VAT to 20%, he could have started at 15% and added one percentage point a year. This would have had a nice stimulus side effect – expecting VAT to rise steadily, people would have spent money sooner. Second, he should have brought infrastructure spending forward rather than postponing it. Not only does the ‘stitch in time’ principle apply to infrastructure, but building during the recession would have cost less and provided additional stimulus. Waiting until the boom merely crowds out private investment without reducing the overall debt. Third, there’s long-term spending restraint on major items such as pensions and the NHS. The chancellor consistently prefers small, short-term, messy spending cuts – such as the partial withdrawal of Child Benefit – instead of reforms that put the

WHEN THE TIME COMES TO RAISE THE PRICE OF DRIVING, ‘LATER’ ALWAYS SEEMS LIKE THE RIGHT OPTION Photo: iStock

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country on a firm financial footing. What possible defence does he have? Only that announcing, ‘Lord, give me austerity – but not yet’ would not have been credible. Politicians are always promising to make prudent-but-painful decisions at some future date – climate change targets ‘by 2050’ are a favourite. So is pension reform – the fiscal challenges were quite apparent 25 years ago, but nobody wanted to be the politician to raise the pension age. Decisions about Heathrow and new electicity capacity have also often been kicked down the road by our political masters. The chancellor is not immune – he’s repeatedly postponed increases in fuel duty; when the moment comes to raise the price of driving, ‘later’ always seems like the right option. Osborne’s plight, then, was that the logic of economics conflicted with the lessons of history. Economics told him to spend in 2010 and promise to introduce austerity once the economy had recovered; history suggested that nobody would have believed him. And applying the squeeze as the 2015 election approached would be too much to ask of any politician. As we await the Autumn Statement, let’s reflect on how we conduct fiscal policy in the UK: we now have not one, but two circus showpieces at which the chancellor must continually surprise the public and catch the imagination of headline writers. It is hardly a surprise that tough promises are constantly unravelling. At a time when we’ve rarely had greater need of long-term thinking in economic policy, our politics have never been further from delivering it. Tim Harford is a Financial Times columnist and the author of a new book, The Undercover Economist Strikes Back NOVEMBER 2013

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News Pension reform

Call for ‘wider conversation’ on LGPS BY RICHARD JOHNSTONE

The government’s approach to reform of the Local Government Pension Scheme is unnecessarily narrow, the chair of England’s largest council pension fund has told Public Finance. Ministers want to overhaul the LGPS to improve investment performance, increase fund co-operation and identify administrative and management savings. Kieran Quinn, chair of the Greater Manchester Pension Fund, said there was widespread agreement among LGPS funds that reform was needed. But he criticised local government minister Brandon Lewis’s decision to consider just three preferred options for change, warning that they may not be effective. On October 18, Lewis announced that the coalition was pushing ahead with scheme reform. He commissioned a report to examine three options: a single national investment fund vehicle; a small number of closely aligned combined investment vehicles; or an

outright merger of the 89 existing funds. This announcement came after a call for evidence looking for possible ways forward closed on September 27. Speaking to PF, Quinn – who also chairs the Local Authority Pension Fund Forum – hit out at the decision to announce the preferred reform options without ﬁrst analysing the consultation responses. More than 120 submissions were made to the call for evidence, which was undertaken by the Department for Communities and Local Government together with the Local Government Association and the shadow LGPS advisory board. The board was established in May to encourage best practice between schemes. ‘Brandon Lewis might be right in saying that these are the three options, but there also might be better ones,’ Quinn told PF. ‘He’s right to say you can’t rest on your laurels, because there are some challenges in the LGPS, such as how do we embed what’s good in

Ready for take-off: local government pension funds are ‘more open’ to investing in projects such as Manchester Airport

the LGPS more widely. But that [information] is contained in the evidence that’s been called for, and I would like a chance to read that.’ Ministers have made it clear they want pension funds – including those in local government – to play a role in economic regeneration, Quinn said. The Greater Manchester fund was ‘more than happy to play its part’, he added, highlighting the recent agreement to invest £800m in a commercial development at Manchester Airport as an example of this. Local government pension funds were becoming ‘much more open’ to conversations about investment in larger infrastructure projects, he went on. However, there were a number of evolutionary changes to existing investment rules that could encourage such deals without the need for broad structural reforms. These included a more ‘sensible interpretation’ of some of current LGPS regulations. ‘My frustration is that [Lewis’ announcement] is like saying, “Which of these three teams do you support – Chelsea, Arsenal or Liverpool?” Well, actually, I don’t support any of them. I think you have to include Manchester United and Manchester City as part of it. We need a wider conversation.’ Upheaval caused by structural changes to the LGPS could also cost more than it saved in efficiencies, he added. GMPF research has indicated that, if funds change asset manager, they can underperform by as much as 65–75 basis points over three to five years. ‘If you were to go from 89 to five [funds], say, what you’re basically saying to the LGPS over the next three to five years is that you’re going to underperform to the tune of about 75 basis points. And when you’re talking about £150bn [the value of the LGPS], that’s a significant amount. ‘So all the benefits of mergers that the

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BetterGovernance ■ Vivienne Russell

Hodge calls for an empowered NAO to increase accountability

overhaul government is talking about would be wiped out in that one move. That’s why consultation is important.’ Nigel Keogh, CIPFA’s technical manager for pensions, told PF the government’s decision to examine three options in an external report also cast doubt on the role of the shadow board as part of the process of LGPS reform. He backed Quinn’s view that more needed to be done to improve collaboration between funds in the current structure. ‘There is an awful lot already in train in terms of collaborative working, and that has been going on for some time. ‘Certainly, there is a lot more funds can explore that won’t require structural change. It can be done quicker, and with less risk and cost. All of these things need to be factored in to the equation when restructuring the LGPS – it’s not something that can be achieved overnight or without cost.’

The National Audit Office should be empowered to audit contracts government bodies enter into with private firms, the chair of the Public Accounts Committee has said. In a wide-ranging speech to the CIPFA Better Governance Forum, Margaret Hodge said the massive expansion of outsourcing across the public sector, and the growth in free schools and academies, was fragmenting traditional accountability structures. She said this lack of clear accountability had made the PAC very dependent on whistleblowers to expose the abuse of public money. Hodge suggested three ways in which scrutiny of public service contracts could be boosted. The first and simplest was giving the NAO the right to ‘follow the public pound in that contract and audit it’ she said. The other two were requiring private firms to make their contracts ‘very open’ and extending Freedom of Information provisions to public service contracts. ‘If this is the way our taxpayers’ money is going to be used, we have to establish better structures of accountability,’ said Hodge.

Follow the money: PAC chair Margaret Hodge said better accountability structures were needed She went on to reﬂect on the legacy of the abolition of the Audit Commission, which left the NAO as ‘the only show in town’ in terms of formal checks on government spending. ‘I feel nervous and uncomfortable about that,’ Hodge said. ‘The task is just ginormous. We are in danger of not doing the job that taxpayers expect us to do.’ Criticism was also reserved for the civil service, particularly its shortage of commercial skills, the high turnover of personnel managing major projects and an often short-term outlook. Hodge was scathing of some senior civil servants’ refusal to

co-operate with PAC inquiries, and said the committee was beginning to assert its powers of summons and use its ability to put witnesses on oath. Reﬂecting on her remarks on the PF Blog, CIPFA chief Rob Whiteman said when civil servants failed to speak out, it was often not through fear. ‘More often, it is the result of a collective bias to optimism in organisations, whereby a given outcome is so desired by those involved that everyone invests in the belief that it will happen. ‘This perhaps well-meaning weakness is perilous when billions of pounds of public money is at stake,’ he said.

Local growth

‘Flawed’ NHB plan comes under ﬁre BY RICHARD JOHNSTONE

Ministers are under renewed pressure to halt the proposed cut to the New Homes Bonus after councils again warned the ‘ﬂawed’ plan would hit critical services. The Department for Communities and Local Government is expected to set out shortly how the NHB, which is provided to councils that approve the construction of extra homes, will be top-sliced. This will contribute £400m to the £2bn Single Local Growth Fund for Local Enterprise Partnerships from 2015/16. The decision, which was ﬁrst announced in June’s Spending Review, has led to concerns from local authorities that projects to boost economic growth, such as improving rural broadband Photo: Alamy /Sam Kesteven

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services, would be put at risk. However, DCLG permanent secretary Sir Bob Kerslake defended the plan. Speaking to MPs on October 14, Kerslake insisted the money would not necessarily be lost to councils as they could inﬂuence the proposals being developed by LEPs. This prompted David Hodge, chair of the County Councils Network, to hit out at government’s ‘single-minded commitment’ to the policy, which he said could hit growth. In strongly worded comments to Public Finance, Hodge said the government’s refusal to revisit the top-slice was ‘regrettable’. He added: ‘CCN’s research has already highlighted how LEPs cannot replace all the strategic growth functions performed by county councils. Crucial projects, like driving rural broadband delivery, risk being derailed through lack of funds because of these proposals.

‘The department needs to acknowledge the negative impact on growth that pooling would create and think again.’ District councils also urged the government to alter the proposal, stating that alternative funding could be found from the centrally retained portion of local business rates. Neil Clarke, District Councils’ Network chair, said formal talks between local government and Whitehall were needed. ‘The government should reassess where they actually get that funding from, and one of the areas they should look at is business rates. ‘We really would relish the opportunity to sit down together and have a mature discussion to support the government in ﬁnding a different way of calculating that funding.’ See David Hodge’s comment on County Deals, page 16. NOVEMBER 2013

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Conference

Analysis Sub-Saharan Africa

An African economic journey How can African nations use their impressive growth to develop sustainable economies and transparent ﬁnances? Mike Thatcher reports from the Mefmi conference in Washington, DC Many countries in the West would be delighted with the rates of economic growth currently taking place across Africa. According to the World Bank, Sub-Saharan Africa is likely to see growth of around 4.9% this year and over 5% next year. But the good news story is tempered by worries over rising levels of inequality, and concerns over the poor quality of public financial management. Moreover, unemployment remains at disturbingly high levels, particularly for young people. These issues were discussed recently at the Combined Forum of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (Mefmi). The Washington, DC event brought together 70 of the top African finance ministers, treasury permanent secretaries and central bank governors. Rohan Malik, Ernst & Young emerging market leader for the public sector, told delegates that six of the ten fastestgrowing economies are in Africa. However, economic expansion had not transferred into sustainable employment. ‘By 2020, we require 60 million new jobs in Africa, over and above what is currently being projected. In most economies in the world, the private sector creates nine out of ten jobs – hence, having a vibrant private sector in Africa is 10

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a prerequisite for success to ensure inclusive growth,’ he said. Maria Kiwanuka, Uganda’s minister for finance, planning and economic development, used her speech at the forum to call for an expansion of publicprivate partnerships. She suggested that African governments needed to establish a better climate for the private sector in order to create jobs. ‘Private sector participation becomes long-lasting if the environment is conducive. The challenge for us then as policymakers is to create an enabling environment in each of our countries,’ Kiwanuka told the forum. Speaking later to Public Finance, Kiwanuka said that Africa had to ‘seize the moment’. It is an ‘auspicious’ time for

Big issues: Mefmi director Dr Ellias Ngalande says one of the main challenges is the dearth of qualified accountants

the continent, she suggested, with Western nations facing their own economic challenges and new nations threatening the historical dominance of Europe and the US. ‘Africa is still the resource-rich continent. We must make sure that we extract our resources in the most efficient manner and use those resources to create sustainable development,’ Kiwanuka said. Uganda is putting this philosophy into practice by introducing legislation stipulating that its oil revenues can only be used to fund infrastructure, and not recurrent expenditure. Once enacted, the Public Finance Bill will mandate the country’s auditor general to audit oil revenues twice a year. Kiwanuka believes the bill will help ‘plug the infrastructure gap’ and turn the country’s ‘black gold’ into ‘green gold’ by creating an agricultural revolution Photo: Reuters/Tullow Oil Uganda/Hari Patience

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Plugging the gap: When Uganda’s Public Finance Bill is enacted, all revenue from oil drilling (below centre) will be used to fund infrastructure and create jobs

‘WHEN ASKED, “WHAT DID YOU DO WITH OUR OIL?”, WE CAN SAY, “LOOK AT THE ROADS, BRIDGES, POWER LINES AND PIPED WATER” ’ — MARIA KIWANUKA, UGANDA MINISTER FOR FINANCE

that is both sustainable and inclusive. ‘The reason we are using our money for infrastructure and not, say, for pensions and consumption, is that our population is 70% young, and it is growing. Their need is not for pensions, but for employment, and so we are using the money to help them get employed. ‘It also takes care of the heritage issue,’ Kiwanuka added. ‘In 20 or 30 years down the road, when we’re asked, “What did you do with our oil, daddy and mummy?” we can say, “Well, look at the roads, the bridges, the power lines, the piped water.” That’s what we’re looking at.’ As well as creating the oil fund, the Public Finance Bill is intended to improve transparency and make the government more accountable to parliament and the people. Kiwanuka has cited the UK and Norway as countries that Uganda can learn from on PFM reform.

Clearly, there is still some work to do. Late last year, the UK suspended all direct financial aid spent through the Ugandan government, as money ‘may have been misused’. Ireland, Sweden, Norway and Denmark then followed the UK’s lead. Uganda has historically been seen as a public sector reform leader in Africa, but it has not always fully implemented the changes. It now appears to be making a stand – and is not the only African country heading down this route. Tanzania and Botswana have recently introduced financial reform programmes, and Kenya has its own Public Finance Management Act 2012. Meanwhile, Zambia’s Sixth National Development Plan has a commitment to improve the quality of PFM, and Lesotho has introduced performance-based budgeting to increase accountability. It shows willingness on the part of African governments, but some academics are sceptical of their likely success. Matt Andrews, associate professor of public policy at the Harvard Kennedy School, says the proof will be in the implementation. ‘PFM reform solutions are often adopted in Africa only as signals to gain external legitimacy, but they don’t solve the problems. You end up producing laws and systems that are

not enforced or used,’ he told PF. The distance many African countries will have to travel can be seen by looking at the qualifications held by senior finance people in government and audit watchdogs. According to Dr Ellias Ngalande, executive director of Mefmi, there is a dearth of qualified accountants in Africa. ‘There are countries where even the accountant general’s office is not headed by someone with an accounting qualification. It will be headed by people who have just grown within the system. ‘They have been shown how to do things, and they do those things. The problem is the government cannot afford certified accountants, so what you end up with is just picking somebody who looks like they are clever with figures and you make them the accountant general.’ Ngalande says that these are big issues that African governments will have to get to grips with. ‘Because unless we do it properly, we’ll end up with resources being generated, but then disappearing because nobody is able to keep a proper record of them.’

Video interviews of Maria Kiwanuka, Dr Ellias Ngalande and other Mefmi attendees can be found at publicﬁnanceinternational.org NOVEMBER 2013

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■ Councils: a bleak 2020 vision by Rob Whiteman ■ Deal or no deal for the counties? by David Hodge

Opinion ■ Rob Whiteman

Councils: a bleak 2020 vision The chancellor’s call for a return to surplus by the end of the next parliament is likely to mean even more cuts by 2020 – leaving a grim outlook for local government We have reasons to be optimistic on the economy. Although we’re experiencing a flatter recovery than in the 1930s, 1970s or 1990s, the UK excels at things demanded globally: science, financial services, luxury goods, universities, design, creative industries and highquality engineering. However, for public service leaders, it’s time to divorce economic recovery from our fiscal outlook – the prospects are grim. Future rising interest rates will push up the cost of government debt, and increasing levels of personal debt will limit scope for tax increases. Added to this are three structural issues: the ageing population; our nationalised healthcare system, which means that improvements in health

Reserve judgements: Media-savvy communities secretary Eric Pickles has suggested that local government’s dilemmas can be solved by operating with fewer reserves

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science fall to the state to fund; and, despite welfare reform, a relatively unskilled workforce that is ill suited to the jobs to be created. All three increase public expenditure to a degree that the government’s room for manoeuvre within the already tight fiscal envelope will be limited. However, at some point, the public may seek a different debate – for example, what level of service is expected rather than what is affordable? This will create a tension with the chancellor’s stated aim to create a surplus by 2020 – perhaps nowhere more so than in local government. By the end of the present Spending Review in 2015/16, local government will have seen spending reduce by 35% compared with 8% in education and a 4% increase in health. But local government has survived, and one could argue that this ‘success’ is therefore taken for granted. Presently, local government is caught

in a bind. According to media-savvy Communities and Local Government Secretary Eric Pickles, it is letting the public down by charging too much for parking, not collecting bins every week or limiting homecare visits to 15 minutes, whereas all of these can be solved by paying the chief executive less, sharing back-office functions and operating with fewer reserves. These issues are undoubtedly important, but arithmetically, they do not equate to the demands of safeguarding children, caring for the elderly or sufficiently investing in adult skills. However, as public opinion still holds the government to account for hospital winter pressures but not for social services, the prospects of any financial respite for local government remain pretty slim. So what now for council finances if the next government wants a surplus by 2020? The answer falls into two distinct categories, which are not unrelated: the structure of council finances and the structure of public spending in localities. Council finances: All parties appear interested in the role of councils in promoting growth. Where traditionally an area improving its prospects was seen by the Treasury as a displacement within the economy, better skills, transport, housing supply or broadband are now seen as good for UK plc in aggregate, too. On capital finance, the prudential framework means that, if it so chooses, government can allow councils to expand borrowing in an affordable way. But on revenue finance, the framework appears to be unfit for purpose. Many councils raise relatively little resource from locally derived taxation, and so are dependent on government Photos: Paul Toeman/Alamy

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Local government is already being accused of letting the public down by not collecting the bins every week and charging too much for parking funding – which, under successive governments of all parties, looks tantamount to gerrymandering. And soon, council tax will need a referendum to increase above low-level inflation. It is doubtful whether the current framework for revenue finance and the new referendum process will last even a decade if placed under further strain by material cuts from 2016/17. So the question remains whether something more sustainable can be built through cross-party support that would last through several parliaments and fiscal scenarios. Local public spending: No government has cracked ‘total

place’. The situation is made more complex by the localism reforms that have introduced police and crime commissioners, clinical commissioning groups, trusts and academies, and helped free local government from much of the previous inspection focus on community outcomes. The impetus for local joining together is therefore unlikely to come from a single view in central government. Local agencies must learn to invest together more regularly. While social care and health integration, and early intervention or prevention, are better for clients, those local agencies must collectively

assess whether a focus on this is better for the taxpayer, too. For example, will integration ease the demand pressures on both NHS and local government budgets? Ultimately, all public services – police, schools, health and councils – will face mounting pressure at a time when the scope for councils to fill the gaps and bring agencies together to stem demand pressures may be impeded by a weak council finance structure that appears unlikely to be capable of withstanding further cuts from 2016/17. Rob Whiteman is chief executive of CIPFA NOVEMBER 2013

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Opinion ■ David Hodge

The only way: Essex County Council’s ‘Deal for Growth’ is a good example of how devolution of economic levers could help to deliver growth to county areas like Southend-on-Sea (above)

Deal or no deal for the counties? The government has missed a trick by failing to create County Deals in the same way it has for cities. This must change IT IS DIFFICULT to comprehend why a government that is so concerned with securing the UK’s economic recovery has failed to provide county areas with the tools to do the job. In particular, why it has not as yet introduced ‘county deals’. Current arrangements are not up to the task. Local Growth Deals do not match the transformative potential of City Deals, and Local Enterprise Partnerships serve a different function. Counties have been left sitting on the subs bench, watching London and the Core Cities demand ever-greater control of economic policy and taxation. This is over and above the freedoms and ﬂexibilities they already have in City Deals. While we support the cities’ localist aims, Whitehall cannot afford to leave County Council Network members out in the cold. County areas account for over 43% of national gross value added – and over half of the jobs in key manufacturing sectors. We have a proven track record of leading on regional growth when no other organisation could. County deals could unlock this potential and put us on the pitch. 16

PublicFinance NOVEMBER 2013

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Counties are not asking for more resources. Rather, just like the Core Cities, we are asking for the freedom to do the job set for us by central government and our communities. And these are not empty words. Counties have detailed plans that prove both the validity and necessity of empowering their regions. For example, Essex County Council’s ‘Deal for Growth’ articulates how government devolution of key economic levers across skills, transport and infrastructure could enable the authority and its partners to deliver 60,000 new jobs, 25,000 homes and a reinvigorated local manufacturing base. The deal typiﬁes counties’ far-sighted and innovative approach to growth, with a 15-year commitment to transport funding, an employer-led Employment and Skills Boards and a £1bn infrastructure fund. The Essex deal ﬂows from its plans for community budgets and, for many areas, county deals would be fundamental to a wider transformational process. In this context, it is disappointing that the initiative to use the community budget process as a tool for economic development has met with such a tepid reception from the government. The wisdom in allowing local

economic decisions to be made locally has been recognised in Lord Heseltine’s report, No stone unturned: the pursuit of growth; in the London Finance Commission’s report, Raising the capital; and by a host of other experts. The wider world gets it, but the challenge is to remove the blinkers from Whitehall, where growth is apparently seen as something delivered only by city areas. County economies are some of the most innovative and dynamic elements of the national economy, and are supported by strategically minded authorities. The fact that a third more new enterprises are being created by CCN member authorities than by the Core Cities goes to show what counties can do when they’re off the subs bench and in play. Many MPs – including shadow local government secretary Hilary Benn and Liberal Democrat president Tim Farron – are beginning to listen. But we need quick action to break the mould. A government looking for strong growth into 2015 should free the counties from the shackles that hold them back. They can no longer afford to ignore them.

David Hodge is chair of the County Councils Network Photo: Shutterstock

22/10/13 14:26:25