Local government funding and the situation facing Scottish councils

"It has been in the interests of central government to convey the impression that if local authorities operated more efficiently, they would be able to provide public services more cheaply and so reduce public expenditure in general and the level of exchequer support to local government in particular.

“Thus, from the point of view of ministers who have taken, in common with all national politicians since 1945, a wholly instrumental view of local government, seeing local councils as primarily instruments for the implementation of national policy, there were great attractions in any innovation which could be argued to give a clear and objective measure of efficiency.”

This is not a description of the current governments at either Westminster or Holyrood, but in fact, an extract from Professor Alan Alexander’s inaugural lecture as chair of Management in Local Government at Strathclyde University in 1991. However, it could well refer to current circumstances, certainly, in the view of Scotland’s local authorities and COSLA.

When the SNP became the minority government in 2007, the administration enjoyed a warm relationship with local authorities. Back then, the concordat agreed between the Scottish Government and COSLA talked of “a new relationship between the Scottish Government and local government, based on mutual respect and partnership”.

In the concordat the Scottish Government promised to “stand back from micro-managing service delivery, thus reducing bureaucracy and freeing up local authorities and their partners to meet the varying local needs and circumstances across Scotland”. Budgets for the next four years were negotiated and agreed between the two bodies.

However, this entente cordiale has begun to disintegrate. Last year tensions surfaced between councils and the Scottish Government over teacher numbers and in recent weeks, since the announcement of the draft budget and local government settlement in December, local authorities across Scotland have expressed anger, not just at the content of the financial settlement, but also about the way they claim they are being offered a funding deal they cannot refuse to deliver Scottish Government policies, with little control at a local level.

Only around 26 per cent of local government income is raised locally through council tax and direct charges and payments for services, with the rest coming from central government. And with council tax frozen, the only part of the budget councils are able to move up or down themselves are direct charges.

The total funding allocation from the Scottish Government to local government will drop from £10.76bn in 2015/16 to £10.15bn in 2016/17, a decrease of 1.7 per cent in the share of the total Scottish budget that is given to local government.

According to the Scottish Parliament Information Centre (SPICe), the Scottish Government’s income from non-domestic rates and its departmental expenditure limit from Westminster has increased by 3.2 per cent in real terms since 2013-14, while the local government settlement has fallen by 1.9 per cent.

Depending on which figures you use, the local government funding cut is 3.5 per cent or two per cent. The 3.5 per cent cited by COSLA is based on the allocation to local government by the Scottish Government, whereas the two per cent cited by the Scottish Government is based on total estimated local authority expenditure, including council tax and other fees and charges. The figure of one per cent that has also been mentioned includes the extra £250m allocated to health and social care partnerships.

COSLA objects to the way the decrease has been described, saying there has “always been a clear understanding between COSLA and Scottish Government as to how the movement in the settlement is described, this being the increase or decrease in revenue grant.”

The Finance Secretary, John Swinney, defended the budget in a recent statement to the Scottish Parliament’s Local Government and Regeneration Committee. He said: “The proposals deliver strong but challenging financial settlement for local government. Scotland’s councils are, however, able to address these challenges from a healthy financial base.

“Local government funding has been protected in Scotland in recent years, with additional resources provided for new responsibilities. This is in stark contrast to the position in England where local authorities have faced a real terms cut in funding of 27.4 per cent over the four year period 2011 to 2015.”

Initially, more than one council was reported to be considering the possibility of defying the Scottish Government’s council tax freeze, which has been in place for eight years and is a manifesto commitment. They expected to lose their share of the £70m awarded to local authorities to compensate for the freeze.

However, in the course of negotiations, it emerged that not only would local authorities lose the funding for the council tax freeze but also the £88m incentive for maintaining teacher numbers and the £250m extra allocated to health and social care partnerships. Failure to meet targets in one area would mean a loss of funding in all three, a hit in cash terms of a share of £408m for any councils that turned down the Scottish Government’s funding offer and went down the council tax rise route.

With council tax making up only an average of 12 per cent of councils’ revenue, it would be impossible for any local authority to raise enough council tax in one year to cover such a loss in central funding as well as generate additional revenue. And it is this ‘triple lock’ that has so angered councils.

COSLA turned down the Scottish Government’s funding package, but local authorities had no choice but to individually accept it.

GMB Scotland predicts 8,785 job losses on the way at Scottish councils. At the time of writing, The City of Edinburgh Council was the only local authority to have finalised its budget for 2016/17, with projected savings of £85.4m to be achieved by the council losing 2,000 of its 18,000 staff, but it isn’t just that that has upset the council’s leader, Councillor Andrew Burns.

“My main criticism of the settlement wasn’t just because of the quantum of the settlement, because the Scottish Government’s got more money in cash terms and they give less money to local government – I mean, that’s bad enough – but the real criticism is of the way it was imposed on local authorities,” Burns told Holyrood.

“It’s been an absolute take it or leave it offer with very, very punitive penalties and for us not to accept any element of the deal would have meant losing £33 million. On top of everything else.

“And for me, as somebody who’s completely committed to local government, it sticks in the throat that we’re being ransomed like this, we’re being told, ‘take it or leave it’.”

The draft budget refers to an “additional £250 million transfer from the NHS to health and social care partnerships to ensure improved outcomes in social care.” This is another source of conflict. It is not part of the local government settlement, but could potentially mitigate the effect of the £350m cut, with the £250m extra for health and social care partnerships meaning that councils need to spend £250m less on social care, freeing up that money for something else.

However, COSLA president David O’Neill says that due to the way this money is ringfenced, it won’t work that way in reality. Half is to be used for “additionality”, building capacity into the system, while the other £125m can be used to address “local government pressures”, in practice the requirement, as part of the ‘triple lock’. that local authorities ensure all care workers are paid the living wage.

“The idea was that local government could take some money out because this money is going in and if they’d left it at that, that might have been okay, but this is what you’ve to do with the £125 million that you have some potential to benefit from, and what they want us to do with it – again in itself not a bad thing – is implement the living wage,” said O’Neill.

So what has changed in the relationship between the Scottish Government and local authorities from the glory days of unity to this situation of increasing conflict?

“I’ll tell you what’s changed,” says O’Neill. “There was a minority government in Holyrood [in 2007] and local government took the view it doesn’t matter if it’s a minority government, you get a better outcome if the spheres of government work together. You get better results for communities. So we did embrace that with some gusto, I’ve got to say.

“Then in 2011 the Government got a majority. The concordat became less important to them at that point and as we have gone on through the lifetime of the parliament, the Government’s desire to control and centralise has risen again. It has become more apparent. It’s more obvious.

“Rather than a relationship which is a genuine partnership, it’s almost as if there’s a desire a) to centralise and b) that local government is only there as a delivery mechanism for their policies. I’ve had a cabinet secretary say that to me: ‘We need you because you deliver our policies. You’re our delivery mechanism.’

“No, we are not! We are part of the governance of Scotland. We are one of three spheres of government in Scotland: local government, Holyrood and Westminster. The fact that some of them consider us a branch office is an affront to local democracy.”

He suggests there is too much attempt to control local functions at cabinet level.

“Because they do sit in Edinburgh behind their desks and think that the cabinet secretary – and I’ll just use education as an example – the cabinet secretary knows best how to run a primary school, a secondary school, a special school, all over Scotland.

“The folk that know how to do it are the folk that are there on the ground. We employ people to do that in local government. They’re called headteachers. They run the school. And they run the school in conjunction with their local authority colleagues.

“The local authority don’t do it by remote control. The headteacher does it.

“We have cabinet secretaries who want to run schools. We have cabinet secretaries who think they know best how to provide home care. They don’t.

“I’m a local councillor. I don’t know how to do it, so I don’t try and do it. We employ the right people to do it. And you let them do the job that they’re meant to do without micromanaging.”

O’Neill claims that they have very little control over how the £10bn of central revenue funding is used, with education and social care spend making up the majority of it, and the cuts having to come from what’s left.

“You’re now looking at something like 75, 80 per cent of local councils’ expenditure [ringfenced], so if you can’t do anything with that, that means that the three and a half per cent cut which features on the 20 per cent that’s left, multiply that by five to show what the three and half per cent means for those individual services, things like libraries, things like economic development, roads, country parks, cutting the grass and verges, litter picking, all that kind of stuff. Stuff which is very, very visible, very noticeable and that communities are very fond of. And you’re going to see these things being decimated.

“If folk see the grass not being cut, if folk see libraries shutting, hours reducing, no new books in libraries, economic development – there’s a number of councils do an awful lot for economic development and they do that because there are high levels of unemployment in their communities – some councils might have to walk away from that altogether.”

What is not known is whether this is one bad year or whether this will continue, and that is making things difficult for local authorities to plan. If they knew the funding situation was going to improve, they might risk using reserves to tide them over, but it would be unwise to use their emergency funds to cover day-to-day expenditure without knowing if they can replenish them for an actual future emergency such as further flooding.

Local government in England has been given funding projections up until 2020, so councils are able to plan how they will manage the cuts over several years, but Scottish local authorities have no idea what 2017/18 will bring. This is not the fault of the Scottish Government, which itself cannot give more than one year’s budget because it does not know what it will get from Westminster, and much of that will depend on the fiscal framework underpinning the Scotland Bill.

Improvement Service has indicated that the current level of funding is not sustainable in future. While its recently published National Benchmarking Overview Report 2014/15 shows a general improvement in efficiency and outcomes, it says: “With more severe budget reductions from 2016/17 onwards, it should not be casually assumed that these improvements will simply carry on.

“Many efficiency and productivity gains have been taken already and further gains will be much harder to achieve. There are significant upward cost pressures in the system associated with changes to pension requirements and ensuring all council and contract staff receive at least the living wage.

“Even if, and it is a big if, wages increased at the very low level of the last five years across the next five years, it is profoundly unlikely that the local government wages and salary bill will rise by less than 2 per cent to 2.5 per cent per annum.

“At the same time, demand for services will grow associated with demographic change, shift to prevention and the impacts of welfare reform. Though it is hard to be absolutely precise here, our best estimate is that demand growth is likely to increase across the period.

“Our best estimate of the impact of demand and costs pressures across the period to 2020/21 is that a gap of over 17 per cent will open between the cost of meeting demand on current service models and the funding available to councils. This will require fundamentally rethinking service models, not just improving efficiency and productivity within existing models.

“Between 2010/11 and 2014/15, Scotland’s councils absorbed a 5.2 per cent real reduction in their spending through prioritising major universal services and improving efficiency and productivity. This was also importantly supported by staff who took a substantial real reduction in their incomes.

“Unfortunately, that was phase 1 and phase 2, 2016/17 to 2019/20, looks like it will see more substantial budget reductions and growth in demand. To address that, transformational rather than incremental change will be necessary.”

Councils are now looking through their books to see what they can cut or get rid of. Councillor Frank McAveety, the leader of Glasgow City Council told Holyrood that his council is “literally looking at what we can flog”.

What happens beyond 2016/17 remains the big question. With the SNP looking likely to form the next government, will it continue the council tax freeze into the next parliament, at least until a new form of local government funding is in place?

Naomi Eisenstadt, Scotland’s poverty adviser, in her recent report on the topic in Scotland, said the Scottish Government had been “signalling changes to the council tax since its first term in office” and should “consider ending the council tax freeze from 2017/18 onwards”, saying this would “make a contribution to protecting public services that are particularly supportive of families in poverty”.

Scottish Labour and the Liberal Democrats have suggested that income tax in Scotland should be increased by 1p in 2016/17 to alleviate cuts, particularly to education. Labour propose to offset this with a rebate of £100 for those earning under £20,000 a year. This would raise extra revenue, but not, as Patrick Harvie pointed out during the budget debate, make councils less dependent on central government funding.

GMB Scotland supports the additional 1p on income tax, which is says would help reverese the erosion of the tax base, which it claims has led to a loss of £450m revenue per year, had council tax had kept pace with inflation.

“It ends the policy of paying for local government in Scotland by robbing Peter to pay Paul. It is not right that wealthy Scottish households pay less council tax in real terms than eight years ago leading to cuts to jobs and services in Scotland’s least affluent areas,” GMB Scotland said.

However, a longer term solution must be found. In December The Commission on Local Tax Reform delivered its report on possible replacements for council tax.

The commission was a cross-party group including representatives from Labour, the SNP, the Liberal Democrats and the Greens, as well as experts in the fields of poverty and taxation. While it is now widely agreed that council tax is regressive and needs to be replaced, the solution as to what that should be is less clear cut.

The commission looked at three possible forms of local government funding that could be used, either individually or as a combination of more than one option: a property tax, a land value tax or a local income tax. Different issues of affordability and fairness, both in terms of those paying and collecting the tax, need to be taken into account, including how closely the tax can be linked to ability to pay.

A property tax would be the easiest to implement, being similar to council tax, but updated to reflect current property values and made more progressive in terms of the difference in the amount paid between the highest and lowest bands. Currently, the highest band pays only three times the amount of council tax as the lowest, yet the difference in property value is 15 times.

Under this scheme there is a discount for those on the lowest incomes that is viewed as complicated, and many who are eligible for council tax relief are thought not to be claiming it. The commission recommends retaining a discount scheme if a property tax is used, but simplifying it and increasing uptake, although it doesn’t suggest ways this could be achieved.

The benefits are that it is well understood by the public, straightforward to implement compared to the other two options and has a high collection rate. It is also relatively stable and, therefore, easy to predict revenues, unlike an income-based tax which can fluctuate greatly throughout the year and from year to year. The disadvantage is that even if made more progressive, it is not as closely linked to ability to pay as an income tax.

A land value tax is similar to a property tax, but is based on the value of a piece of land, disregarding any buildings or development on it. Similar to a property tax, it is thought it would have a high collection rate as it is impossible to hide land. It would also encourage development, as unused land would be taxed at the same level as land that was developed. Although commonly used in other countries, it has not been used recently in the UK, so both the lack of public understanding and of comprehensive land value information raise issues with its implementation.

The third option presented in the report is a local income tax. This has the benefit of being clearly progressive in its connection with ability to pay. However, issues arise here too. Because tax on savings and dividends is reserved to Westminster, only tax on income from employment and pensions could be included in a local tax, meaning those who have wealth but not income might not pay a proportionate amount. It would also be more avoidable than a land or property-based tax.

Collection is also difficult. Scotland does not have its own means of collecting income tax nationally, nor do Scottish local authorities. If it was proposed that HMRC should collect such a tax on behalf of Scottish local authorities, that would require UK Government approval. If a Scottish income tax office or 32 local offices were set up, that would be very expensive.

It might also mean that someone doing the same job and earning the same salary from the same company would pay different levels of tax. Were it to be administered through PAYE, it would put another burden on employers. Alternatively, everyone would have to complete a self-assessment, something unlikely to be popular with the public and with a lower collection rate, at 84.6 per cent, than either PAYE at 98.4 per cent or council tax at 96 per cent while being more expensive to administer.

COSLA has indicated that it would prefer a property-based tax, but it will come down to each of the individual parties to put forward a proposal ahead of the election in May.

However, any new local taxation must have broad cross-party support, given that it has to be accepted and implemented by councils across the political spectrum and is likely to be in place for many years, if not decades, to come.

All of the options proposed are intended to raise the same amount of tax that a continuation of council tax would, so they would still not address the issue of the proportion of local government funding that is controlled locally.

The change is also likely to take some years. The Commission on Local Tax Reform has indicated that primary or secondary legislation will be needed to bring about a change in local taxation and estimates it will take at least two to three years before a new system of local taxation can be in place, and longer still for a land value tax, because the information needed to base it on is currently incomplete.

There would most likely also need to be a phasing-in period of any new system over a couple of years to avoid anyone being faced with a sudden large increase to their bill.

While funding has dominated the debate around local government in recent months, and is likely to continue to be a contentious issue up to the Scottish parliamentary election and beyond, much more is changing in local government.

No complete restructuring of local government is imminent, but big changes are coming to its ways of working, in joined-up working with other public bodies and with community groups. Health and social care integration will lead to changes in the delivery of social care and a moving of budgets. There is also increased working between local authorities with, for example, the three island authorities pushing for more autonomy and an innovation zone, the Borderlands Initiative between Scottish Borders Council, Dumfries and Galloway Council and three local authorities in the north of England, and the Ayrshire Joint Planning Steering Group.

City deals also offer the opportunity for local authorities to work together on economic development and major infrastructure projects that benefit the whole region. The Glasgow and Clyde Valley City Deal has already begun to deliver completed projects and Aberdeen has just been awarded city deal funding – albeit less than some had hoped for – with decisions on city deals for Edinburgh and Inverness expected later this year.

While perhaps less of a concern in the short term than revenue, capital budgets also need the benefit of long-term, multi-year budgets. The Accounts Commission recently criticised Scottish local authorities for a lack of strategic planning around capital expenditure, with a response from COSLA questioning how long-term strategic planning was to be managed with only single year budgets.

The Community Empowerment Act comes into force this year, requiring all local authorities to have community planning partnerships. Local outcome improvement plans will replace single outcome agreements, setting out the priority outcomes for that community along with an action plan to achieve them. Community groups will be able to put in participation requests to public bodies to work on an area of need or improve a service.

Perhaps the biggest change will be around asset transfers, with communities able to request that public sector bodies sell, lease, manage or use the land and buildings they own. The request to do so must be granted unless the public authority has “reasonable grounds” not to.

These changes are not new but a continuation of direction of travel towards more localisation and collaboration, but nevertheless, they present a step change in practice. With the levels of cuts to budgets, councils will need to be able to do the same, or more, as demand on social care increases, for less. Unquestionably, new ways of working and partnerships are going to be vital if there is to be any chance of maintaining key services in the coming years.