PF November 2014 by Redactive Media Group

PublicFinance

The business monthly of the public sector

publicďŹ nance.co.uk

Issue 11 November 2014

NOVEMBER 2014

Norman Lamb How Better Care just got better

Free lunch time Why infrastructure is a global win-win

The big what? Charities on the edge of an identity crisis

after the

fall Autumn statements, budget deďŹ cits and other seasonal disorders

p001_PFInov14_cover.indd 1

23/10/2014 20:03

the public services experts Our new and improved professional accountancy qualification for 2015 The public services environment we operate within iss changing, as a result our Professional Qualification is too. It will: ial skills needed needed Increase the focus on the wide range of commercial by UK public finance practitioners. d private sectors. Deliver greater portability between the public and Provide more entry routes for holders from other qualifications and experienced professionals. Enhance the Practical Experience Portfolio (PEP) by placing greater emphasis on the role of the employer. ine Enable greater flexibility around blended and online learning options. d a successful successful This will put our students in the best position to build career in public finance. To find out more visit www.cipfa.org/newPQ or email newPQ@cipfa.org Find us on:

at I’m proud to have a qualiﬁcation that m represents integrity, professionalism and above all, dedication to public ﬁnance. Judith Savage CPFA Finance Partner, Newcastle City Council

p02_PFINov14.indd 14

21/10/2014 12:05

PublicFinance

CONTENTS

November 2014

Features 24 COVER STORY Can the centre hold? The Institute for Government on why the 2015 spending review and the 50% of cuts still to come matter more than the Autumn Statement

30 Uncomfortable truths What does CIPFA want from the political parties come May 2015? Rob Whiteman heralds the institute’s election manifesto

34 Stick to the knitting? Dan Corry on the charities stung by criticism that they should curb their campaigning and pick up the pieces as the state withdraws from service provision

38 Time to get building? The IMF has shifted gear in favour of more public infrastructure spending. Vivienne Russell reports from Washington on the new growth strategy

‘ALL PARTIES RISK GIVING THE IMPRESSION THE WORST IS BEHIND US WHEN IN FACT THE OPPOSITE IS TRUE’

Regulars 4

Leader Welcome to the gloomy new normal

Second thoughts Philip Johnston says the election will be fought on the economy and the NHS

6 News Better Care Fund is here to stay, says Lamb; more mutuals in prospect; and call to ease town hall borrowing rules

30 Need to Know

14 Opinion Cecilia Wong on the housing affordability crisis; Peter Fleming on a new home for local audit; and Jim Bligh on the reshaping of public services

On Account CIPFA on the new international framework for ﬁnancial reporting

43 Smart Thinking? Does the public sector have the culture and skills to exploit innovative thinking?

Management Development Clear thinking can take the weight off your shoulders when the jobs pile up

p03_PFInov14_contents.indd 3

Watchdog Watch

Voice of the Nations Holyrood’s expanded tax powers will mean Scotland must get infrastructure spending right

Numbers Game

PublicFinance

8 News Analysis Uncertain future for the Barnett Formula; and the impact of withdrawing Council Tax Beneﬁt

Subscribe today for the latest expert comment on public policy and ﬁnance

Scan here to subscribe to the leading magazine in public ﬁnance...

23/10/2014 20:01

CONTACTS

Leader y

The new mediocre

here should be uncontained excitement at HM Treasury right now. The UK economy is set to grow at the fastest rate in the G7. And unemployment is at its lowest level since 2008. All good news for a chancellor preparing his pre-election Autumn Statement. Instead, there’s a distinct air of seasonal melancholia, with much talk of secular stagnation and dampening down of expectations. The downbeat mood was summed up recently by IMF boss Christine Lagarde who has warned we face ‘a new mediocre’ – a sort of ‘meh whatever’ shrug about the state of global growth. This autumnal chill is partly down to headwinds from the EU – particularly with Germany on the brink of recession – and from China’s rapid slowdown. Not to mention the geopolitical risks that have spooked the financial markets. But the chancellor also faces some seasonal disorders of his own. Top of the list is the deteriorating state of Britain’s public finances. With public borrowing up by £5.4bn on this time last year, the Treasury’s deficit reduction targets now look distinctly unrealistic. The underlying shortfall in tax receipts is due in part to very weak pay growth – reflecting the ‘not worth it’ jobs culture unwittingly alluded to by welfare minister Lord Freud. All of which points to a serious revenue problem for the Exchequer – and some migraine-inducing challenges for government bean-counters. CIPFA’s 2015 manifesto – previewed in this issue (pages 30-33) – makes a plea for far greater honesty and realism about the fiscal position faced by the next government.

How, for example, does the Treasury chief secretary’s warning about stronger spending controls square with the burgeoning demands on vital services coming down the tracks?

How, in particular, should any future administration respond to the pitch by NHS England chief executive Simon Stevens – in his five-year ‘forward view’ – for an extra £8bn in the next parliament? And if this special pleading for the NHS is successful, what does it mean for other less loved and protected areas of spend? Answers will be required by the time of the 2015 spending review, whoever is in charge of the purse strings. As the Institute for Government argues (p24-29), with 50% of cuts still to come, it is this event – not the Autumn Statement – that will set the mood for our increasingly beleaguered public services. Welcome to the gloomy new normal.

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

REDACTIVE PUBLISHING LTD 17-18 Britton Street London EC1M 5TP 020 7880 6200 www.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@publicfinance.co.uk Contributors Paul Nettleton, Keith Aitken Senior designer Gene Cornelius 020 7880 6227 gene.cornelius@redactive.co.uk Picture editor Akin Falope 020 7324 2713 akin.falope@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 James Condley 020 7324 2750 james.condley@redactive.co.uk Display Sales executive Vlad Harmanescu 020 7324 2726 vlad@redactive.co.uk Sponsorship sales manager James Brunt 020 7880 6230 james.brunt@redactive.co.uk Recruitment sales executive Emmanuel Nettey 020 7324 6234 emmanuel.nettey@redactive.co.uk Senior production executive Aysha Miah 020 7880 6241 aysha.miah@redactive.co.uk Printing Polestar Stones, Banbury, Oxon To subscribe to Public Finance at the annual UK cost of £100, call 020 8950 7010 or email publicfinance@alliance-media.co.uk. International annual subscription rates range from £130 - £205. 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

ISSN 1352-9250

Average circulation 16,127 (Jul 12–Jun 13)

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

PublicFinance NOVEMBER SEPTEMBER2014 2011

p004_PFInov14_leader.indd 4

23/10/2014 20:00

Second thoughts pfOpinion

■ Philip Johnston

Different song, same tune The next election will be fought on economic competence and the NHS. So no change there then These are unusual times. The Fixed Term Parliament Act ensures that we know the date of the election – May 7 next year, barring an unexpected collapse of the coalition. This means the current parliament is the lamest of lame ducks. Although there has been a Queen’s Speech and legislation is beginning to appear before MPs and peers, nothing controversial will get through before the election. Nonetheless, opportunities exist for the Conservatives to score political points, for instance by impaling Labour and the LibDems on the horns of English votes for English laws. Equally, the Tories will be haunted by Ukip’s threat to their seats all the way to election day. But ministers still have a few chances left to make the political weather and two of them fall to Chancellor George Osborne. On December 3 he will deliver his Autumn Statement. Then, next March, he has one last Budget with which to bribe voters – sorry, make some

well-earned adjustments to taxation. The Autumn Statement is unlikely to be Osborne’s most comfortable appearance in the Commons. He had intended to clear the budget deficit by now and yet it remains stubbornly hard to dent. Even the Office for Budget Responsibility’s revised target of reducing borrowing to £95.5bn in 2014/15 from £105.8bn in 2013/14 may have to be readjusted, to Labour’s glee. Borrowing from April to August, for instance, was £45.5bn – £2.6bn higher than the same period last year. To a great extent this has been caused by a fall in income tax receipts caused by pay restraint and an increase in selfemployment. Higher VAT revenues and stamp duty income from a booming housing market have failed to offset the shortfall. The chancellor must ponder whether to plug the hole with more spending cuts or tax increases. He has already hinted at his answer. At the Conservative Party conference in Birmingham, Osborne said taxes had borne enough of the burden of cutting the deficit; so we can expect to see the first signs of the next round of public spending cuts.

CHANCELLEOR GEORGE OSBORNE HAS A CHANCE TO MAKE THE POLITICAL WEATHER IN HIS AUTUMN STATEMENT Photo: iStock

p05_PFInov14_2nd_thoughts.indd 5

Since the NHS is being protected other departments, many of which struggled to achieve the reduced spending levels of the past four years, are going to have to take a serious hit. There is a trap here for Labour. Although it has promised to run a looser fiscal ship if returned to office there will still be pressure to say how the party will get the deficit down, as promised by Ed Balls, shadow chancellor. If Labour pledges to protect spending, the Tories will say that a vote for Labour means a certain tax rise. However, things may be looking up for Osborne by Budget day if wages grow and income tax from the selfemployed provides a revenue windfall in January. This may give the chancellor leeway to offer some pre-election sweeteners without wrecking his plans. Although voters clearly have other preoccupations at the moment, most strategists expect the election to be fought – as in 1992 – on the twin issues of economic competence and the future of the NHS. The coalition – and especially the Conservative Party – has set great store by bringing down the deficit and yet it will still be more than £100bn annually by next May. The Tories will say this shows how dreadful the public finances bequeathed by Labour really were. To which Labour will argue that earlier growth would have increased revenues and reduced borrowing. But most voters want to know if they will be better off and to be sure that the country won’t end up in another recession. ‘Don’t let Labour mess it up’ will be the central Tory campaign pitch, both to floating voters and Ukip renegades. It’s nice to know that some things remain the same even in these unusual times. Philip Johnston is chief leader writer of the Daily Telegraph NOVEMBER 2014

PublicFinance 5

23/10/2014 19:59

News Integrated health and care

Lamb says Better Care Fund ‘here to stay’ for integration BY RICHARD JOHNSTONE

Care minister Norman Lamb has revealed that an expanded version of the government’s flagship Better Care Fund will be the likely mechanism to fully integrate health and care spending across the country. Speaking exclusively to Public Finance, the Liberal Democrat minister said he had set the target to pool all health and care spending by 2018 so there was a date the entire system could prepare for. ‘I want the approach to evolve rather than having anything imposed. The only imposition is to say that we have got to get budgets pooled locally completely, and I’ve talked to a lot of people about this and I think we’ve come up with a neat solution to achieve the pooled budget without a national reorganisation, which nobody wants,’ Lamb said. ‘The Better Care Fund seems to me to be the sensible way of achieving that objective, to progressively increase the extent of the pooling, and as you do that I think you remove the perverse consequences of the gaming across the boundary between the two.’ Plans for the first year of BCF integration, with a minimum of £3.8bn set to be pooled from next April, are being examined by the Department of Health after submission on September 19. Lamb said he was sure the BCF was ‘here to stay. I don’t think anyone would want to try to dismantle that approach, and your objective should be to expand that as a staging post towards achieving that total pooling.’ However, Lamb said the final models would vary across the country. ‘You say 6

to local areas, “this is the objective, it’s got to be pooled by this date, you set about working out your way of doing it”. ‘I think different models will emerge, and I see no difficulty with that at all, I favour a more permissive NHS where different areas do things differently. ‘Some areas might chose to base it on clinical commissioning groups with local authority representation on that board, some areas may chose to do it under the auspices of the local authority and the health and wellbeing board.’ Lamb also indicated that he expected the amount of funding pooled across the 151 BCF areas in England to be ‘significantly bigger’ than the £3.8bn mandated by ministers. Following changes to the operation of the fund in July, which tied some of the pooled money to reducing emergency hospital admissions, concerns were raised that some areas may only allocate the minimum needed to the plans. However, Lamb added: ‘I don’t want to make a prediction about what will finally emerge, they’re all working on their plans that have been submitted, but I’m confident it will be significantly more than £3.8bn.’ Although there were risks involved in the creation of the BCF, he insisted the scheme had ‘got change moving at a local level’. Asked if it was possible that some of the 151 plans might not be ready for implementation from next April, Lamb added that ministers could only sign off each once they were convinced the plan would be effective. ‘I’m reasonably confident we can get there,’ he added. ‘There’s always a Bell

curve – there are some right at the front who are demonstrating really impressive change, there is a great chunk in the middle who are doing pretty well, there are a few laggards at the back who will need more help and guidance to get things really moving.’ Responding to Lamb’s comments, a CIPFA spokesman told PF there was now a consensus that health and social care needed to be better integrated if the delivery of both was to remain ﬁnancially viable in the long term. ‘The development of the Better Care Fund is much welcomed and we must ensure it is a success, but all involved must be honest about the amount of new money involved in the fund and the time taken to make returns on its investments. ‘We must also make sure that we don’t simply put budgets or organisations together without changing the models of care they provide, so performance targets and rules should be minimised in favour of encouraging innovative practice.’ Izzi Seccombe, chair of the Local Government Association’s Community Wellbeing Board, told PF the Better Care

PublicFinance NOVEMBER 2014

p006_007_PFInov14_news.indd 6

23/10/2014 19:57

publicﬁnance.co.uk/news

MutualSpinouts ‘I THINK WE’VE COME UP WITH A NEAT SOLUTION TO ACHIEVE THE POOLED BUDGET WITHOUT A NATIONAL REORGANISATION’ NORMAN LAMB

Fund was ‘a good start’ to integration, but stated it would be short-sighted to expect it to solve the problems of the health and social care system overnight. ‘It is indisputable that in order to improve the lives of older and vulnerable people in this country there is a need for signiﬁcant changes to the way that social care is funded,’ she added. ‘A ﬁve-year commitment to join up funding between health and social care would provide the certainty and stability required to transform care services for the people who need and rely on them.’

Richard Johnstone

Pooled spending will lead to more mutuals, says Maude Government initiatives to integrate public spending are likely to lead to the creation of more public service mutual ﬁrms that can bring local provision together, Cabinet Office minister Francis Maude has told Public Finance. Maude said that the 100 ﬁrms spun out from the public sector since 2010 under the government’s Mutuals Support Programme had already been able to integrate services in a way the state could not. One business, Inclusion Healthcare in Leicester, had taken on contracts from Public Heath England and the local police and crime commissioner, as well as the clinical commissioning group, since being formed from the city’s healthcare service for homeless people, he pointed out. ‘What they were able to do by spinning out of the NHS [and] becoming an independent social enterprise was gain a

huge amount of freedom to do things differently – to innovate, to fashion and conﬁgure services around the needs of their patients – in a way they wouldn’t have been able to before,’ Maude said. ‘In terms of localism, that gave them the power, through contracts with different parts of the public sector, to do things which were very responsive to the needs of their patients and service users.’ As government initiatives to pool public service funding expand – such as the programmes to help troubled and at-risk families – the integration role for mutuals would increase, he added. ‘It is more and more clear that [the way] you get real advantage is by organisations, who are not the state, actually carrying out and providing the services. They have much more ﬂexibility about adapting around the needs of the users.

‘devolved status’, with greater control over taxes, could also lead to the creation of a municipal funding market in the UK. The group’s Unleashing metro growth report proposed that combined authorities, such as Greater Manchester, submit bids for devolved status. These would be examined by an independent devolution committee, to check they met

Local government

Ease borrowing rules, says O’Neill BY RICHARD JOHNSTONE

Local authority prudential borrowing rules will need to be reviewed if additional ﬁscal powers are devolved to town halls, a leading economist has said. City Growth Commission chair Jim O’Neill said its proposal to allow combined city authorities to bid for Photos: Sam Kesteven/iStock

p006_007_PFInov14_news.indd 7

Devo Manc: Combined authorities should bid for devolved status, argues the City Growth Commission

‘It is mutual spinouts, social enterprises, voluntary and charitable organisations, as well as the private sector organisations, who can actually build and conﬁgure services around the underlying needs of the users.’ Maude said that the state ‘will always tend to be providing services down particular stovepipes, with much less ability to operate holistically’. Contracts with mutuals were a measure that allowed funding to be brought together and used more effectively. ‘The state could never do that as the provider. You end up with clunky bureaucratic arrangements,’ he said. ‘But these organisations have the ﬂexibility to grow the services around the needs of the users and deliver it. ‘The money’s coming through different stovepipes but coming into one place, with the same people providing the services.’

required governance standards. Following this, localisation of property taxes from Whitehall and long-term funding settlements would be agreed. Speaking to Public Finance, O’Neill said this would need to be backed by increased freedom to borrow, including clearer rules on local authority bonds. The Local Government Association was developing plans for a municipal bond agency, but some authorities were ‘petrified’ of the risks of such issues, he added. Existing rules, which allow local authority borrowing for capital projects, constrain authorities, O’Neill said. Greater financial freedom meant the regulations should ‘definitely’ be re-examined to reflect changes to the balance of risk. ‘It’s the whole issue of risk versus return. You have to loosen the rules [but] in a way that the borrower knows in advance – as we’ve seen in the global credit crisis – that they’re taking risk. You could not do it in a way that [said], “Go and do whatever you want and we’ll bail you out.” There’s no way you could do that,’ he told PF. OCTOBER 2014

PublicFinance 7

23/10/2014 19:57

publicﬁnance.co.uk/news

MutualSpinouts ‘I THINK WE’VE COME UP WITH A NEAT SOLUTION TO ACHIEVE THE POOLED BUDGET WITHOUT A NATIONAL REORGANISATION’ NORMAN LAMB

Richard Johnstone

Local government

Ease borrowing rules, says O’Neill BY RICHARD JOHNSTONE

p006_007_PFInov14_news.indd 7

Devo Manc: Combined authorities should bid for devolved status, argues the City Growth Commission

PublicFinance 7

24/10/2014 10:53

News

Analysis A veteran of Jim Callaghan’s government once told me that the Barnett Formula only came into being because the Labour prime minister hated to miss his lunch. Cabinet meetings were regularly prolonged by rows between the territorial departments – the Scottish, Welsh and Northern Ireland Offices – over spending allocations. So the Chief Secretary to the Treasury, Joel Barnett, was sent away to find a mechanism where rows were avoided, agendas completed by lunchtime and the PM kept happy. Whether this story is true, Barnett was certainly only ever intended as a temporary fix. That it has kept the peace, more or less, through decades of constitutional argument and change bemuses many, including its inventor, who is on record as calling its survival ‘a national disgrace’. So it’s ironic that Barnett may finally bite the dust because of a popular decision in favour of the status quo: Scotland’s 55%-45% September referendum vote against independence. Even before the vote, a Dods poll found that nearly two-thirds of English MPs (83% of Tories, 41% of Labour and 78% of Liberal Democrats) wanted Barnett scrapped. Following the vote, the clamour grew for promised extra powers for Scotland to be balanced by fixing devolutionary anomalies for the rest of the UK, including Barnett. CIPFA has added its voice to this debate, with chief executive Rob Whiteman saying retention of the formula ‘just isn’t feasible’. The formula works by applying UK departmental spending decisions, up or down, proportionately to the block grants that fund the nations. Proportionately, though, is a loaded word. How the devolved administrations then spend these ‘Barnett consequentials’ is left largely up to them. Everyone agrees that Scotland does well out of Barnett, with a per capita spend some £1,200 above the UK average. Barnett himself has insisted that the baseline population figure on 8

PublicFinance NOVEMBER 2014

p008_009_PFInov14_analysis.indd 8

Scotland

What price the Barnett Formula? Scotland’s post-referendum debate has put the controversial funding mechanism back in the spotlight. However, its future looks uncertain. Keith Aitken reports which the formula was calculated was simply wrong from the first, and has become more so over the years. Supporters say the differential reflects the higher costs of delivering services to a population dispersed across remote highlands and islands, and Scottish National Party ministers add that, if oil revenues are taken into account, Scotland remains a consistent net contributor to the UK Exchequer. Most of the fiscal proposals before

Lord Smith’s commission on further devolution would move areas of the Scottish Budget outside the block grant, and therefore beyond the reach of Barnett. The Conservatives want to devolve all of income tax and hypothecate corporation tax raised in Scotland to Holyrood. Even if only some of that comes to pass, the block grant will shrink by some 15% under the provisions of the 2012 Scotland Act, which from 2016 allows Holyrood to Photo: Getty

23/10/2014 19:53

publicﬁnance.co.uk/news

QuoteUnquote Barnett fair? Supporters say that the funding differential reflects the higher costs of delivering services to a population dispersed across remote highlands and islands

‘You have to get beyond the arithmetic of Barnett and understand what it’s trying to do, which is to recognise that we are an asymmetrically devolved country.’ Jim Gallagher, ad adviser, Better Together

‘The now n recognised issue of underfunding must be dealt de with – there should be an overall funding package which is fair to Wales.’ pack Jane Hutt, Welsh ﬁnance minister

vary the basic rate of income tax above 10p in the pound. These fiscal adjustments, actual or potential, are reinforced by political threats. Many Tory backbenchers are demanding a resolution to the ‘West Lothian Question’, by restricting Commons votes on England-only issues to English MPs. The problem is the definition of England-only. Spending decisions on the NHS or schools in England might seem the epitome of England-only issues. But, as Gordon Brown has warned, they would have a knock-on effect on Scotland through the Barnett consequentials. Perhaps more compellingly, Labour foresees a position where it might have an overall Commons majority but be outnumbered by Tories for most Commons votes. England-only is not popular either with the Liberal Democrats, who can block it for as long as the coalition persists. Meanwhile, both Labour and Plaid Cymru are demanding that the benefits of any further devolution to Scotland be matched in Wales. Today’s Chief Secretary to the Treasury, Danny Alexander, has accepted in principle the case for a better Welsh Barnett deal in a

2012 inter-government agreement with Welsh finance minister Jane Hutt. And the Treasury has tacitly acknowledged Wales’s spending disadvantage with occasional ad hoc allocations, such as help to match-fund EU money. Hutt told Public Finance that Welsh ministers felt ‘very strongly’ about redressing the imbalance, and saw clear scope in the post-referendum constitutional review to do so. ‘The now recognised issue of underfunding must be dealt with – there should be an overall funding package which is fair to Wales.’ So are Barnett’s days finally numbered? Former Calman Commission secretary and Better Together adviser Professor Jim Gallagher told PF: ‘What the pro-union parties were saying when they committed to the Barnett Formula during the referendum campaign was essentially that the Scottish Government would always be funded by a mixture of its own taxes and shared UK taxes – that was one of the big messages of the [No] campaign. ‘You have to get beyond the arithmetic of Barnett and understand what it’s trying to do, which is to recognise that we are an asymmetrically devolved country. ‘Only Westminster can decide the priorities of the reserved powers, and therefore between the reserved and the devolved. Having made that choice, the UK has then to find a way of allocating the devolved administrations a fair share of all the money that’s being spent on devolved services and it has to do that in a way that doesn’t interfere with the rights of the devolved administrations to decide the priorities within that spending. A block grant is

the logical way to do that. ‘The Barnett Formula works very simply to do that. It survives because it works, because it does the job.’ But at CIPFA, Whiteman observes that such pragmatism might not be able to endure for much longer now the constitutional landscape has started to shift. ‘If political parties are sincere in their stated vow to share resources equitably across all four nations, the Barnett formula in its present form is likely to be unworkable.’ The institute wants to see an independent commission established to develop a fair and transparent means of allocating resources across the UK. John Curtice, veteran commentator and professor of politics at the University of Strathclyde, does not foresee an abrupt early end to Barnett, but thinks it will wither away in coming years. Barnett, he says, is much bigger politically than financially. ‘The Tories might try, but the angst you create in Scotland is greater than the benefit you get south of the border.’ At most, he reckons, England might gain £2bn from scrapping the formula, hardly a massive boost to spending. Early action is more likely to redress Welsh grievances. ‘I think what will happen is that the UK Government will up the baseline to which it applies – the amount of money involved would be so small anyway in UK terms,’ he predicts. ‘The crucial bridge that was crossed by the 2012 Scotland Act is that the Treasury has signed up in principle to the idea that certain revenues raised in Scotland are already hypothecated to Scotland. It’s very, very difficult to see why it’s worth the political hassle of explicitly getting rid of Barnett as opposed to letting it wither on the vine.’ NOVEMBER 2014

p008_009_PFInov14_analysis.indd 9

PublicFinance 9

23/10/2014 19:53

News Analysis Help line: Citizens Advice reports that council tax has overtaken credit cards and unsecured loans as a cause of personal debt

Beneﬁt cuts

Council tax drags poorest into debt Withdrawal of Council Tax Beneﬁt has resulted in a postcode lottery for households that can’t pay part of the bill, writes Neil Merrick. Local authorities are also feeling the effects, with arrears on the increase

It used to be credit cards, or unsecured personal loans, but not any more. This year, according to Citizens Advice, the number one cause of personal debt is council tax – and the reason is staring everyone in the face. Since April 2013, people on low incomes have no longer been able to claim council tax benefit (CTB) and so possibly avoid paying any council tax. Instead, English local authorities have come up with a range of support schemes that often require households which previously paid no council tax to contribute. The result? Arrears have risen, along with the cost of chasing them. Figures from the Department for Communities and Local Government show total arrears rose by 21% in 2013/14, from £691m to £836m. Analysis by the New Policy Institute for the Joseph Rowntree Foundation shows that 235 of the 326 English authorities that collect council tax saw arrears increase last year, with the largest increases coming in areas where councils charge higher minimum sums. The cost of chasing non-payers is also increasing, with councils spending £233m on court and administration costs last year – up from £209m. The NPI report, published in September, reveals how nearly three-quarters of councils where households are required to pay more than 20% of their council 10

PublicFinance NOVEMBER 2014

p010_011_PFInov14_analysis.indd 10

tax saw increased court and administration costs. Wirral, which demands a minimum payment of 22%, saw its costs increase from £234,000 to £896,000 while, in Newham, where the minimum is 20%, costs rose from £1.6m to £3.4m. The problem is that, in many cases, councils are chasing relatively small sums owed by low-income families who are not used to paying the tax. During the first half of 2014, more than 70,000 people sought help from Citizens Advice over council tax arrears – up about 20% compared with the first six months of 2013. Gillian Guy, chief executive of Citizens Advice, acknowledges that local authority budgets are stretched, but says: ‘They must ensure that the resources available for their local council tax support schemes are focused on those who are most in need.’ Councils chose in early 2013 whether to continue giving poorer households the same level of relief as under CTB. If they did, they had to find ways to cover a 10% cut in government funding. Some that did not impose minimum payments tried other solutions, such as scrapping rebates for second adults who live with people on low incomes or cutting the level of savings people can hold and still qualify for assistance. NPI describes the situation as a ‘postcode lottery’ with, in some cases,

neighbouring councils adopting vastly different approaches towards poorer families. ‘It’s grossly unfair that people in the same circumstances are receiving very different levels of support depending on where they live,’ says NPI research officer Sabrina Bushe. According to another study by NPI, 1.5 million of the 2.3 million families involved live below the poverty line and 1.8 million rely on means-tested benefits because no family member is in work. This year, 244 councils require all working-age households to pay a minimum sum, compared with 229 during the first year after CTB was abolished. Only pensioners who Photos: Getty/PA

23/10/2014 19:49

publicﬁnance.co.uk/news

QuoteUnquote ‘Councils should consider the implications plications for the collection rate when deciding ding their schemes for next April.’ Peter Kenway, director, New Policyy Institute

‘Coun ‘Councils must ensure that the resources available for their local council tax support avail schemes are focused on those who are sche most in need.’ Gillian Guy, chief executive, Citizens Advice Gillia

‘THERE HAVE BEEN MORE REMINDERS AND MORE SUMMONSES TO COLLECT THE SAME AMOUNT OF MONEY’ DEAN LANGTON, SOCIETY OF DISTRICT COUNCIL TREASURERS

qualified for CTB and paid no council tax are automatically protected under local support schemes. So what difference is all this having on collection rates? Not as much as you might imagine. A study in July by the Society of District Council Treasurers shows collection rates fell marginally, from 98.16% to 97.96%, between 2012/13 and 2013/14. Eighty-five per cent of councils said they collected as much as, or slightly more than, expected last year. But the hassle is increasing. Dean Langton, the society’s lead adviser on council tax support, says: ‘There have been more reminders and summonses to collect the same amount of money.’ Langton dismisses the argument that councils are inconvenienced by the need to chase small sums of money, as that was also true under CTB. The main problem is confronting households who have not paid council tax before. ‘It’s about people getting used to paying on a regular basis,’ he says. All local authorities collected 97% of council tax due in 2013/14, down 0.4 percentage points on the previous year. Peter Kenway, director of NPI, said: ‘The fall in the council tax collection rate between 2012/13 and 2013/14 was only the second decrease since council tax was introduced in 1993/94. Councils should consider the implications for the collection rate when deciding their schemes for next April.’ The NPI report shows 78% of councils that cut council tax support in 2013/14 saw increased arrears, compared to 47% of councils that offered the same assistance as under CTB. In Stoke-on-Trent, where households must pay a minimum of 30%, arrears have risen from just under £3m to

nearly £6m. The council points out it had an extra £6.5m to collect this year as more households became eligible to contribute. It uses a range of methods to chase arrears, including out-of-hours calling. ‘We take a dim view of those customers who can pay but refuse to do so, and where appropriate, we have started to instigate formal proceedings,’ a spokesman said. The London Borough of Islington runs a cashback scheme where households receive £15 if no money is owed by March. Last year, about 9,000 households received £15, but the council admits it cannot say what effect this had on arrears. In Weymouth, the authority gave some people until May to clear last year’s bill. But households in arrears that do not contact the council are more likely to be summoned to court than granted an extension. ‘We look at each case individually,’ says revenue and benefits manager Stuart Dawson. In 2013/14, councils that introduced a minimum payment of 8.5% or less qualified for transitional government relief. But that was only available for one year. The NPI research found only 69 councils are now charging 8.5% or less, down from 113. Some authorities are consulting on what to do in 2015/16, with options including higher minimum payments. ‘It’s possible that support will be reduced further,’ says Bushe. Councils are generally reluctant to discuss their individual arrears picture or the sums they are spending chasing late payers. As one council finance director said: ‘It’s quite an emotive issue politically, particularly in the run-up to the general election. It’s just another welfare reform.’ NOVEMBER 2014

p010_011_PFInov14_analysis.indd 11

PublicFinance 11

23/10/2014 19:49

Party Conferences

News

Cameron vows to balance books THE PF TEAM REPORTS BACK FROM THE ANNUAL PARTY CONFERENCES

£25bn funding gap but no tax increases Prime Minister David Cameron has pledged to balance the public finances by 2018 and said a Conservative government would not increase taxes to tackle the £25bn funding gap that still needs to be closed. His speech at the party’s conference set out a plan to make Britain a place ‘that everyone is proud to call home’. He also committed to raising both the tax-free personal allowance and higher rate 40p tax band if he remains prime minister after next May’s election, so that people keep more of their own money to spend as they choose.

spent. ‘We mustn’t stop new ideas that come from outside the NHS – whether from charities or, yes, the independent sector,’ he added. Hunt said Labour was ‘scaremongering’ that such provision amounts to privatisation. ‘When the last Labour government used the independent sector to bring down waiting times that wasn’t privatisation either,’ he said.

Local government Former local government minister Bob Neill has said the government should set

a target for half of the total tax take in England to be devolved to councils and combined authorities. Speaking at a CIPFA fringe event, Neill – a minister in the Department for Communities and Local Government for two years until September 2012 and now the Conservative Party’s vice-chair for local government – said fiscal devolution was ‘a massive bit of unfinished business’. ‘What we need in the next term of I hope a Conservative government is to finish the job, and that means a major shift of financial powers to local authorities,’ Neill told delegates.

Benefits Chancellor George Osborne has set out plans to freeze the value of most benefits for two years from April 2016 as part of an extra £25bn worth of cuts needed to balance public spending. Osborne said this was the latest estimate from the Treasury of the amount of savings that would be needed to bring the public finances into surplus. A two-year freeze on benefits would save £3.2bn a year.

NHS Health Secretary Jeremy Hunt has defended the government’s use of private- and third-sector providers in the NHS as a way to improve the efficiency of the service. Hunt said external providers helped to ensure that taxpayer funds were well 12

PublicFinance NOVEMBER 2014

p012_013_PFInov14_conference.indd 12

National pride: David Cameron set out his plan to make Britain a place ‘that everyone is proud to call home’

Photos: PA/Alamy

23/10/2014 19:46

publicﬁnance.co.uk/news In the pink Ed Miliband setting out his 10-year plan to boost heath and social care, expand housebuilding and tackle low pay

Alexander wants ‘ﬁscal fairness’ rule

Health and homes in Miliband vision Labour leader Ed Miliband has set out a 10-year plan for Britain that includes a £2.5bn boost for health and social care, a large expansion of housebuilding and halving the number of low-paid people in the country by 2025. Setting out his six-point proposal for the future, Miliband announced a new £2.5bn fund to improve care in a combined NHS and social care service, paid for by a Mansion Tax. He also set targets to create one million hi-tech jobs, increase the number of apprenticeships, and ensure wages can grow in line with the economy.

English devolution No solution has yet been found to the problem of how to introduce greater fiscal devolution in England while also maintaining elements of redistribution, shadow local government secretary Hilary Benn has said. Labour planned to devolve more control over services to increase the efficiency of spending in areas such as transport and skills, he told delegates. Asked whether this would include devolution of taxes to local areas, Benn said: ‘The question I would put to you – because I haven’t yet seen the answer – is how do you combine fiscal devolution on the one hand with on the other hand redistribution of revenue.’

Integrated care A Labour government would reform

NHS hospitals to become integrated care organisations under plans to merge physical health, mental health and social care provision, shadow health secretary Andy Burnham has announced. Setting out more details of the party’s pledge to create a National Health and Social Care Service, Burnham said a Labour government not only would ‘rescue a shattered service’ by repealing the coalition’s Health and Social Care Act, but also set out ‘a vision for a 21st century NHS there when you need it’.

Communities The centralised state is increasingly ineffective in dealing with the UK’s problems and ‘devo max’ to communities is needed, shadow Home Office minister Steve Reed has said. Speaking at a CIPFA fringe event, Reed – MP for Croydon North – said centralised decision-making meant people felt remote from decisions. Nationally-set welfare provision and problems faced in integrating health and social care were among reasons people feel ‘cut off’.

Chief Secretary to the Treasury Danny Alexander has set out plans for deficit reduction based on three fiscal rules involving both spending cuts and tax rises. Alexander said that if the Liberal Democrats formed part of the next government, a ‘fairness rule’ would also be introduced to ensure that the wealthiest people continue to contribute most to the deficit reduction.

One North Liberal Democrats have committed to implementing the One North plan to improve transport links across the North of England and boost growth. At the party’s conference, Deputy Prime Minister Clegg said the party would help develop and implement the proposals, set out by an alliance of the cities of Leeds, Liverpool, Manchester, Newcastle and Sheffield. The £15bn plan called for a new trans-Pennine highspeed line.

Mental health Clegg also announced the creation of the first-ever waiting time targets for mental health services in his speech to the party conference. The plans are part of a proposed £500m investment to ensure treatment for mental health is available across England in the same way as for physical health.

Local government

‘How do you combine fiscal devolution on the one hand with on the other hand redistribution of revenue?’ HILARY BENN, SHADOW LOCAL GOVERNMENT SECRETARY

A former Treasury advisor has warned that the system of local taxation in England is ‘broke’, and has called for a radical transformation of the state through devolution in response to spending reductions. Speaking at CIPFA’s fringe event at the Liberal Democrat party conference, Julia Goldsworthy, a former special advisor to Chief Secretary to the Treasury Danny Alexander, said that without reform, local government could ‘fall over’ amid the impact of planned cuts.

NOVEMBER 2014

p012_013_PFInov14_conference.indd 13

PublicFinance 13

23/10/2014 19:47

publicﬁnance.co.uk/news In the pink Ed Miliband setting out his 10-year plan to boost heath and social care, expand housebuilding and tackle low pay

Alexander wants ‘ﬁscal fairness’ rule

Integrated care A Labour government would reform

Local government

‘How do you combine fiscal devolution on the one hand with on the other hand redistribution of revenue?’ HILARY BENN, SHADOW LOCAL GOVERNMENT SECRETARY

NOVEMBER 2014

p012_013_PFInov14_conference.indd 13

PublicFinance 13

24/10/2014 11:16

Solving the affordability crisis, by Cecilia Wong Forward thinking required, by Jim Bligh

A place for robust audit, by Peter Fleming

Opinion Cecilia Wong

Solving the affordability crisis Proposals in the Lyons Housing Review provide a roadmap for delivering the right type of housing in the right location Housing issues facing the UK have changed markedly over the last 20 years. There are fewer physical problems with housing stock, but more concerns over affordability and the environment. After the recovery from the global financial downturn, the underlying policy issues of rapid house price inflation and market bubbles, high demand for owner-occupation, restricted land supply, and relatively few new-build programmes in the social sector are resurfacing. Boom-and-bust housing cycles have long challenged governments. However, the affordability crisis has become aggravated over time. Figures from the second quarter of 2014 show that the 14

PublicFinance NOVEMBER 2014

p014_015_PFInov14_opinion_freer.indd 14

average UK house price is about £186,000, but over £400,000 in London. This represents an 11.5% annual increase for the country and over 25% in London. Considering the average starting salary for graduates is about £20,000 and slightly more in London, it is no surprise there is an affordability crisis. Even in supposedly more affordable Manchester, average prices range from £613,000 in Bowden to £78,000 in Gorton; which means that only the university’s vice chancellor can afford to live in Bowden and no graduate can even afford a property in Gorton's most deprived area. The difference between the ‘haves’ and ‘have nots’ is all about access to property ownership, as well as inheriting from family members who accumulated housing wealth through price inﬂation. This is the right time to have a grown up debate about how to tackle a housing crisis that, if left unchecked, will damage

the life chances of our future generations. The recent report of the Lyons Housing Review provides a roadmap to stimulate debate and action from government and stakeholders at all levels. The review, under the leadership of Sir Michael Lyons, provides a comprehensive package of policy levers and instruments that will help to make a step change to deliver the right type of housing in the right location. As a spatial planner, I think there are two very powerful policy toolboxes. On the one hand, the opportunities for local authorities to designate Housing Growth Areas, New Homes Corporations and Garden City Development Corporations. Combined with improved compulsory purchase orders and tax incremental ﬁnance, these will allow more innovative approaches to increase housing supply. On the other hand, the proposed National Spatial Assessment, which Photos: Getty

23/10/2014 19:54

publicﬁnance.co.uk/opinion

Peter Fleming In the red: Buying a house even in the most deprived streets of Gorton in Manchester is out of reach of graduates on the average starting salary

would draw together the spatial implications of infrastructure and growth and economic development policies, the development of Housing Market Strategic Plans and the creation of a Housing Observatory to monitor trends in housing supply will strengthen the policy framework of housing delivery. The last piece of the jigsaw is political leadership and commitment to tackling the housing crisis and delivering at least 200,000 housing units a year. While the creation of a cross-departmental housing task force and an independent Housing Commission will help, past experience suggests local politics and nimbyism can be millstones round the necks of those making ambitious housebuilding plans. Commitments can only be meaningful if financial resources are made available to tackle this entrenched crisis, a challenge for any government elected next May. While we have to provide sufficient housing to places with the highest demand and needs, we should not lose sight of the win-win strategy of spatial rebalancing. Housing does not seem to enter the equation when we talk about the North-South divide. The rebalancing debate should not just be confined to the economic performance of the peripheral regions, but also the capacity of London and the Southeast to manage the growth pressures for sustainable development. With the election looming, it is inevitable that political schism will come into play. However, it also provides opportunities to deal with some thorny issues on resources and a strategy for the North. Cecilia Wong is professor of spatial planning and director of the Centre for Urban Policy Studies at the University of Manchester. She was a member of the expert panel that advised the Lyons Housing Review

A place for robust audit to thrive in the future A company set up by the Local Government Association will pick up statutory functions after the closure of the Audit Commission After three decades of monitoring public spending, the Audit Commission is preparing to close on March 31 2015 and transfer continuing functions elsewhere. One body picking up previous statutory functions of the commission will be Public Sector Audit Appointments, set up by the Local Government Association but wholly independent. PSAA will be taking up the key responsibilities of appointing auditors and prescribing scales of fees for audit – ensuring that councils, the emergency services and health bodies continue to enjoy high quality external audit at a cost-effective price. The appointment of Steve Freer, former chief executive of CIPFA, as PSAA's chair is an important first step in demonstrating the required stature to make decisions on audit appointments that will uphold the highest standards of independence and good governance. A Tupe-like transfer will enable experienced staff from the commission’s audit compliance team to make a seamless transition to the new company. Statutory functions transferred to PSAA will include maintaining analysis tools such as value-for-money profiles and the fee comparators that enable audited bodies to check whether they are getting value for money, as well as, for the time being, responsibilities for specifying the arrangements for certification of Housing Benefit subsidy claims. While we at the LGA have set up PSAA, it is independent and its remit extends beyond local government. The

PSAA’s staff and board will seek to ensure that it properly understands the needs of key stakeholders, including health organisations, fire and the police, and other smaller bodies, as well as local councils. PSAA is a transitional body. Under the ‘saved’ provisions of the Audit Commission Act 1998 it will manage existing contracts with appointed private sector firms until at least 2017. In due course, ministers will decide whether to exercise an option to extend these contracts to 2020. The commission has secured highly competitive rates in these contracts and we are keen to see these preserved for as long as possible for the benefit of all local public sector bodies. PSAA will have a key role in ensuring that standards of financial accountability are maintained. Its priority will be to ensure the maintenance of local audits reflecting the very highest standards. Once these transitional arrangements come to an end, local public sector bodies will have the power to appoint their own auditors. However, the LGA has successfully lobbied for a change to the Act, as a result of which local bodies can together continue to procure audit at a national level. We believe that this will continue to deliver competitive prices and avoid the necessity for each audited body to establish its own independent audit appointments panel. For now, the priority is setting up PSAA as a genuinely independent company through which robust and cost-effective auditing can continue to monitor and scrutinise the spending of public money. Peter Fleming is chair of the Local Government Association’s improvement and innovation board

NOVEMBER 2014

p014_015_PFInov14_opinion_freer.indd 15

PublicFinance 15

23/10/2014 19:55

Opinion Silver bullet: Digital access needs extending to older pople as public services migrate online

Jim Bligh

Forward thinking required The CBI believes public services cannot revert to the ways of the past. But what shape should they take? It’s time for a national conversation Public services are part of the foundation for a growing UK economy with healthy, educated and productive people. But current models of public services face big challenges now and in the future. We need to build a consensus across society about what our future public services should look like. Businesses want to be part of the conversation as companies and their employees have a stake in future public services as users, taxpayers and providers of services. The CBI’s vision is one where public services fit around citizens’ lives and join up to tackle the root causes of the problems people face. Achieving this will require tough choices about spending priorities and a frank dialogue with the public about what services will look like in the future. The UK economy has finally returned to the path of growth after the global financial crisis. But the pressures on public finances mean our public services cannot revert to the ways of the past. At the same time, the needs of our society

are changing. We have to identify new approaches and new solutions to enable the UK to manage four big challenges facing our public services. The CBI’s report Our future public services has identified these four challenges, which are not sufficiently reflected in political parties’ plans for government. The first challenge is to learn to live within our means even after the current fiscal consolidation is completed. For 18 out of 21 years between 1993 and 2014 the government spent more than it collected in taxes. The savings needed to get the public finances in order currently stand at £77bn, the equivalent of £1,200 per person in the country. The second challenge is meeting the needs of an ageing population. The population aged over 65 will grow by 39% by 2030, while the working-age population will only grow by 2%. That so many people now live into their 90s is testament to great advances in medical sciences, as well as improved understanding of public health. But the demographic shift will need public services to move in step to meet changing needs. The third challenge is for public services to adapt to changing expectations and lifestyles. Digital

Better connected In 2004, 1.6% of adults owned a smartphone. Ten years on the figure is 61%

PublicFinance NOVEMBER 2014

p016_017_PFInov14_opinion_CBI.indd 16

technologies mean our way of life is becoming more flexible and connected than ever before. In 2004, 1.6% of adults owned a smartphone – 10 years on, the figure is 61% and rising. At the same time, more and more of the UK’s population are living on their own or have caring responsibilities. If their needs are to be met effectively and affordably, public services have to be remodelled to give people a better chance to shape and control how they want to receive and communicate with services. The final challenge is securing public buy-in for evolving public services. Public services will have to change – and to go on evolving in the future. Achieving that is a challenge in itself. Public services are deeply valued by people from every background as an essential safety net. We have to find new ways to build public backing for changes in services – and to bring in more people with fresh ideas to help shape and improve those services. The CBI sees three big solutions that will begin to address these challenges. First, we need to get the balance right on funding for future public services. Second, we need to fit services around how people live their lives and third, the UK needs to start a national conversation about how public services should change because citizens, as funders and users of public services, need to be part of the decision-making. The next government should balance the impact of deficit reduction by looking at potential contributions from protected budgets and cost-effective welfare spending. In the long term we need to ensure public services are built on a solid fiscal foundation. The CBI believes this can be done by linking public spending to GDP growth and by introducing a ‘sustainable fiscal rule’ in the next parliament to be implemented once fiscal consolidation is complete in 2018/19. This will ensure the government spends no more than the revenues it raises (38% as a share of GDP) over the economic cycle. Cost-effectiveness and adaptability Photos: Alamy

23/10/2014 19:41