Local Government Committee,

Meeting date: Tuesday, May 8, 2001

Official Report 328KB pdf

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Budget Process 2002-03

We should start again: the sooner we start, the sooner we will finish.

We now move to the committee's deliberations on the budget process. Professor Arthur Midwinter, the committee's adviser, is sitting on my right, although I am quite sure that he would rather be sitting on my left.

The Convention of Scottish Local Authorities is here first and we have with us Norie Williamson, who is the director of finance. Norie, you know the drill as you have been here before. We will ask you questions after you have commented for a couple of minutes.

Thank you for the invitation to give evidence this afternoon. I apologise on behalf of Councillor Andy White, COSLA's finance spokesperson. He had to handle a difficulty that arose at his local council today. He very much wanted to come along to the committee.

On the consultation document, COSLA welcomes the first development in trying to put in place a more open and inclusive budgeting process. That comes on the back of the announcement of firm, three-year figures for local councils, which will provide stability and assist in longer-term planning. Having said that, the process can always be learned from. The consultation arrangements could benefit from some refinements, such as the early development of the joint consideration of priorities between central and local government. It would be helpful if the figures that appear in the consultation document were reconciled with the other figures that have been announced to local government, as there are disparities between the two sets. It is important to emphasise that local government is committed to continuous improvement. However, as the document that was circulated to you points out, there are a couple of funding gaps that local authorities are having to cope with nationally.

The first is a gap between local authorities' budgets and the provision by the Executive through grant-aided expenditure. That gap, which amounts to some £440 million, is built into the system at the moment. The second gap is the difference between COSLA's submission to the spending review last summer, on the strategic resourcing of effective local services, and the actual level of the resources over the next three years that have been made available by the Executive. That gap amounts to about £700 million, although the Executive's resources still have to be topped up by the additional moneys for McCrone. Those gaps are placing pressure on local government.

Added to that is the on-going difficulty of the central direction of ring fencing. It is important not to get tied up in semantics on that. I am sure that if the question was put to ministers, the stock answer would be that ring fencing is about 10 per cent, so what is the difficulty? The difficulty that we in local government have is that beyond that, virtually every penny of additional resources that has been made available for the next three years is directed centrally by the Executive. That puts considerable pressure on local authorities to deliver on their core services. The partnership approach needs to be developed to give more local discretion, flexibility and trust to councils to deliver on agreed joint priorities. Local outcome agreements provide a means of developing that. We are anxious to proceed with the concept, but it must be signed up to across the Scottish Executive.

All those comments relate to revenue. Similar issues apply to capital. Last summer, we identified investment needs of about £2.8 billion. That level of investment need cannot be met in the present control system. Given the increasing blurring of the line between revenue and capital through greater use of public-private partnerships and private finance initiatives, the case exists for considering abolishing section 94 consents and introducing a more flexible local safeguards approach.

Housing may not fall directly within the committee's remit, but COSLA remains concerned about the continuation of the 75 per cent set-aside on housing receipts. We will continue to challenge that.

I welcome the committee's inquiry. COSLA is committed to participating and assisting in that process. We have established several officer groups and elected-member groups to develop the policy that we set out in our framework written evidence. We hope to do that in the next few months.

The abolition of section 94 consents and the 75 per cent set-aside for housing receipts is being raised in our inquiry into local government finance. Part of our report will deal with that. I am sure that ministers will take up that point.

I apologise again for my voice, which is getting bad again. Have you made any assessment of the budget's implications for local government staffing levels?

We have not identified that. The issue is difficult to assess, because the delivery of services to the public is a paramount concern, perhaps more than the staffing levels in local government. Depending on arrangements, different interpretations can be placed on staffing levels.

I have a question that is more for clarification; I do not really have a point to make. The tables that COSLA produced raise some obvious questions about where some figures come from. You calculated £724 million of extra demand in table 1. Will you explain how that was costed? What are the demands? Table 1 also takes into account the demographics as a resource pressure that adds nothing in year 1, 2 or 3, but £208 million in the long term. How did you arrive at those figures?

The exercise was conducted last spring and summer, leading up to our submission to the spending review. We categorised the cost pressures and burdens into various elements, of which demand is one. The exercise covered issues such as the McCrone report on teachers' pay, school security, pay awards and single status. I can leave behind a copy of that submission, if that is useful background.

Demographics do not fit into the figures for years 1, 2 and 3 because we consider them a longer-term issue. The demographics in relation to the elderly population show a problem. In that document, we tried to emphasise the ticking time bomb of the percentage of the population that the elderly will represent in 10 to 15 years. We tried to assess that as a longer-term costing within the £200 million.

Have other pressures that are reducing been costed against that figure? Regardless of the political debate, indicators show that more people are working. Poverty indicators are showing signs of improvement and the number of children who are entering primary schools is falling. Have those factors been taken into account and costed against the increase at the other end of the age scale?

Some of those matters are difficult to cost. We have responded that the assessment of the cost pressures that local authorities face must be more realistic. As part of that process, local authorities' capacity to deliver further efficiency savings must be taken into account. As you say, we can build into that the demographics that might go the other way, such as those on pupil numbers. However, any such task must be balanced with the priorities on pupil:teacher ratios, for instance. Although all of that needs to be taken into account, my overall answer is that we hope for a more honest and open assessment of the cost pressures facing local government.

On that last point, on page 5 of your submission, it is stated:

"There needs to be more honesty in settlement announcements",

and:

"it is disingenuous for ministers to suggest that previous cutbacks in the funding of core service provision have been recognised in the settlement."

What has been the impact of the recent settlement on core services?

Perhaps the specific aspects of the matter will be better addressed by the individual councils in the two evidence sessions to come. However, local authorities have tackled the pressures over recent years both through cutbacks in services and by considering increases in fees and charges. As part of our evidence to the committee's local government inquiry, we will suggest that we have probably exhausted our capacity to address the problem in those ways, and that we must take into account the market demand issues that feed back from it.

Has the Executive been fair-minded in that regard? Are the pressures effectively even across all local authorities, or have specific local authorities or types of local authority been put under more pressure than others?

That question brings us back to our evidence for the review of the revenue grant distribution system. We have tried to suggest that the problem with the system is not the distribution process itself, but the overall level of resources being put into the equation. There are also major difficulties with the gearing ratio of 20:80 on local tax. However, we acknowledge that the current grant distribution system is better placed to serve the previous local government structure, and we are trying to come up with a fairer system that more realistically reflects the new local authority structure.

Under the heading "Spending Pressures" on page 3 of your submission, you mention

"a major funding problem for police and fire pensions etc."

Although I know that such issues have been raised in the Parliament, what are your specific concerns about such funding?

Again, that pressure has been building for some time and it has not been addressed in UK pension policy. Although I know that the Home Office has considered the issue and has recognised that there are difficulties, it has no direct plans for dealing with the problem. Increasing retiral costs for the police and fire services are putting more and more pressure on those services without there being any direct recognition in the settlement.

If there will be peak years for such costs—for example, 2004 has been mentioned as a peak year for the fire brigade—are you looking for one-off payments to cover them?

Although we can more readily predict the peak years in the police and fire services, we did not cost them directly in this exercise; that costing process is rather refined, because the individual has a degree of flexibility about when they retire. However, the peak years might well add to the cost pressures that we have identified.

I want to explore some of the issues around ring fencing and central direction. Obviously the Executive has certain priorities and certain policies that it must implement, and the Opposition members at the committee table will make criticisms if it also delivers reduced class sizes and so on. However, the Executive does not directly deliver such services. How should the relationship between the Executive and local government develop to ensure that the Executive's objectives can be met without increased ring fencing or central direction?

You made the important point that central Government does not deliver services directly. That emphasises the need at the outset for a joint planning arrangement in determining priorities. Many priorities in the programme for government are supported by local government. Flexibility must be allowed within the whole system for local government, subject to appropriate monitoring, to deliver on those priorities rather than control the inputs into the process. We have moved a long way this year with the abolition of spending guidelines. The focus should be put on the outcomes that are desired by both sides. Local outcome agreements are certainly the way forward. We are considering piloting such agreements.

I know from my local government background that there is often inconsistency in approach. Every time something arises—you mentioned police and fire pensions and your submission refers to the consequentials from the £2 billion that the Chancellor of the Exchequer allegedly gave away in the budget—local government's response is to ask for extra money to fund it. It is almost saying that it wants some ring-fenced or top-sliced money to ensure that it can meet the cost of additional burdens. Is there a contradiction there, or are you looking for a general increase in resources in the hope that local government might meet the cost of police and fire pensions and so on from that?

We are starting with a funding gap at the moment of £440 million. Regardless of whether you challenge the fine detail of our calculations, the gap will be £700 million—the exact figure might be higher or lower. The message is that there is a substantial gap, which we need to address. We need a more realistic recognition from ministers of that gap and of what local government can achieve without central direction of how every penny should be spent.

Your report highlights the excellence fund. Do you see any role in future for such a fund through which central Government encourages local authorities to take up particular initiatives or move in certain directions, or do you think that such a mechanism is outdated and that we should look at other ways of doing that?

Certainly, the excellence fund is a major specific grant arrangement of which we have been critical since its introduction. When it was introduced, we called for a more flexible arrangement like the previous arrangement, which was more outcome based and was not tied up in specific grants. We hope to address excellence funding in our submission to the inquiry. We pointed out on a number of occasions the inconsistencies that ring fencing leads to.

You include within your analysis of specific grants the police specific grants. Is it COSLA's position that police specific grants should be abolished?

I do not think that we have a particular position on that. We will consider that as part of our evidence to the inquiry.

On page 5 of your submission, you say that you have concerns about hypothecation and ring fencing, yet on page 1 you appear to ask for it in that the supplementary allocation on education this year was ring-fenced and you say that you should have the full application. You seem inconsistent on whether you believe in ring fencing.

Are you referring to the chancellor's March budget consequentials? Previously, we have discussed such consequentials with the Executive. The arrangements that have been put in place in Scotland have been far more flexible than in England as particular moneys have been directed to individual schools in Scotland. We have strongly argued that the needs of particular schools may not be the same across the country and that there needs to be flexibility at local authority level to direct the resources where they are needed. We hope that whatever money comes from those formula consequentials, a similar level of flexibility will be provided to local authorities.

On page 3, under "Spending Pressures", the submission states:

"in addition to the necessary restoration of previous cutbacks".

According to the Executive and most Labour councils, there have been no cutbacks since the Tories left—they have all been savings. Are those cutbacks not savings?

There have been a number of cutbacks in the levels of services, but there is a firm commitment to continuous improvement. There is a more realistic assessment of the capacity to make cutbacks. Perhaps I could have used a more refined definition of the word cutbacks. For example, I referred earlier to fees and charges: those are cutbacks through another means, as they have been introduced to make good the insufficient level of resources.

So you have not made the efficiency savings that the Executive was asking for.

On demand, your submission states on page 2:

"there are various external demands on councils including a greater awareness of services and ‘rights' leading to increasing expectations of public services."

Can you give us examples of those rights and demands?

That is a general indication that, as we are well aware, the public are more interested in the services provided by the local authority and much more in the local authority's face, so to speak, in indicating their demands.

Although we have moved away from spending guidelines, the council tax benefit subsidy still exists. I notice that the committee asked for comment on that. The system that we would like to see in place is that if the local public demand a specific service and are prepared to pay the price for it, there should be flexibility at local level for it to be delivered without the clawback in council tax benefit subsidy being applied.

Can you give us examples of the types of services that you are talking about?

They are services such as care in the community, which is a significant issue. It is necessary to home in on the big service areas, such as education and social work. There is considerable demand for a certain level of service in education. This comes back to joint priorities. Local authorities have similar priorities to those of the Scottish Executive on improving the adult:pupil ratio. It is about how that can be delivered with flexibility being given rather than, for example, targeting the employment of classroom assistants.

I was disappointed that you mentioned the two big spenders, social services and education. Those services receive the bulk of ring-fenced and hypothecated moneys. The services that suffer include roads and pavements. Are not those services that the people demand?

Roads are a key issue, which is mentioned in our submission. This comes back to the honesty in the statements; we were led to believe that £70 million had been included for revenue maintenance of roads. On questioning, it became apparent that that money was on capital investment on roads, and on further questioning, we were led to believe that it was not a specific amount; it was included in the single consent. More honesty is needed in those statements as they create the perception that additional resources in those areas have been included.

I have a similar question. The second paragraph on page 4 of COSLA's submission states:

"The Scottish Executive's narrow definition of ‘new burdens' needs to be expanded to recognise all spending pressures within settlement calculations."

"Will you expand on that, or give some examples of what you mean?"

Some of the new burdens have not been recognised: for example, landfill tax and the climate change levy place legislative burdens on local authorities.

We welcome the fact that, for the first time in eight years, inflationary provision has been made within the settlement. That assisted greatly in negotiating three and four-year pay deals. However, there must be a more realistic recognition of the level of that provision, because only part of the projected inflation amount was included in the settlement. We suggest that the full amount be included. If local authorities settle at a higher level than that, that is part of their negotiation process, but we would like there to be a more realistic approach to the calculations.

Midway down page 6, you state in your submission:

"The solution lies in the development of joint policy and expenditure priorities, shared between central and local government."

Does not that indicate that more control is being passed to the Government? Is not it time that local authorities were taking control and breaking that link a wee bit more?

It is not a control culture. It is a partnership culture, which brings me back to the earlier comment that central Government is reliant on local government to deliver its priorities. The partnership needs to be in place. Local authorities are signed up for several priorities, but the whole process needs to start earlier in the form of a joint planning framework. Early consideration should be given to such priorities and how they should be resourced.

Would not that lead to your operating the Government's priorities rather than your priorities?

No. I am sure that occasionally there will be a difference of opinion about priorities, but I am not for a second saying that local government will blithely go into such a discussion and sign up for any priorities. We will stand on our own two feet and genuinely sign up to our priorities. The agreement between Norman Murray and the Minister for Finance and Local Government sets out the arrangements for putting that in place.

I have not met one local authority that does not want rates back in its control. Do you consider that local government would handle the discrepancy that is building up between England and Scotland—a 9 per cent differential—better than the Government has done so far?

Various issues are associated with such matters. In our written evidence to the inquiry and in our submission, we have set out our "in principle" position about the return of business rates without taking a particular view on the matter. We want to develop and clarify that position during the next few months. We recognised in our submission the perceptions of the business sector. We need to put in place control arrangements to tackle those perceptions and make sure that there is not the impression that business rates might increase more quickly than council tax levels. We must maintain the balance. Consideration must be given to the balance between domestic and non-domestic taxation within local government.

I remind the committee that, although I have a sore throat, I am still here, although perhaps not contributing to the debate as much as I usually do. Will members of the committee please address their questions through the chair? I am sure that Donald Gorrie will be absolutely perfect.

That was a warning.

I am here today because the Finance Committee is anxious to learn how Parliament and various committees deal with the budget. We are making an honest attempt to improve the budget system.

I wish to ask Norie Williamson three questions. When you have taken away the targeted money in the Executive's budget, are other parts of council expenditure reduced in real terms? Are figures available to show that expenditure with regard to cleansing or library books, for example, has gone up or down over the past three years?

Annexe 2 of our submission gives details about that and gives to the penny the additional resources that have been allocated to local government. It is the Scottish Executive's analysis. It is directing every penny to particular areas, as a result of which there is no flexibility to improve existing services. Yes, there has been a reduction in real terms in core service provision. There has been no increase in the settlement.

Is that quantified?

No, it has not been quantified. Over the next month or so, we shall be analysing individual councils' budget information that is coming in now and comparing it with the previous financial year.

Is it difficult to track money? A lot of services are provided through public-private partnerships or by arms-length companies that run facilities such as sports centres. If those companies claim commercial confidentiality, it makes it harder to track the public pound. Is that a correct description of the situation? Is there any way that we could track money better?

In many respects, we recognise that what is important is the service that is provided for the public, regardless of whether it is funded publicly or privately. Private finance initiative arrangements can be tied up quite tightly, but PPP is an issue. In a PPP arrangement, only the service costs appear in the local authority's accounts. The greater use of PPPs adds weight to our argument for the abolition of section 94 consents. Tracking where the money goes is an issue in the public sector.

One sphere that the Finance Committee is considering is the funding of the voluntary sector. It is difficult to get a Scottish figure, as each authority does its own thing. Does COSLA have Scottish figures that would help to illuminate discussion of whether voluntary sector funding has gone down a lot?

We do not have direct sources, but it may be of assistance to know that in social work, returns are made on voluntary sector grants. Difficulties in tracking public money are increased by the much more joined-up delivery of services by local authorities, the voluntary sector and the health service.

Towards the bottom of page 7 of your submission, you say:

"There is a major investment need in local government".

That was costed at £2.8 billion. You go on to say that

"the overall investment need cannot be delivered under current resource and system constraints."

What additional resource is COSLA looking for? What is a realistic period in which to deliver that investment?

We were trying to address spending need in principle. The required investment was costed on the basis of maintaining existing assets, not on developing spend-to-save initiatives that might result in further efficiency savings on the revenue side. If we are to make progress on issues such as 21st century government, we need a radical examination of funding, beyond initiatives such as the modernising government fund.

We are making the case in principle for investment and for the need to move away from the control culture, where capital is scored twice for public expenditure purposes. We need to free up the whole arrangement.

I want to return to sitting down and agreeing joint priorities centrally and locally. It is perhaps more difficult to do that on the capital side than it is on the revenue side, because individual councils' capital investment needs vary considerably across the country.

If there is a £2.8 billion shortfall and councils want to upgrade existing assets, how long would it take to bring them up to scratch at current levels of investment?

I am sorry, but I do not have that sort of information.

Are assets improving or deteriorating?

We welcome the fact that capital consents have increased, which will assist in improving assets, but a major issue that needs to be addressed is the backlog, for example in school property repairs. The fundamental question is whether it is wise to invest to make good existing school properties or whether investment should drive what school education will look like in 15 or 20 years' time. We need to build the assets that will deliver the future education system.

Do you believe that the Executive has looked seriously at that?

A working group is to be established to look at it.

Keith Harding raised an issue about roads, which are covered on page 6 of the COSLA submission. I will read the section for Keith Harding's benefit. It says:

"On 28 September the Transport Minister stated that ‘Years of neglect have left our local roads and bridges in an appalling state. To tackle the backlog of repairs I am allocating an extra £70m to local authorities up to March 2004. I expect councils, at the very least, to maintain this year's level of current and capital spending on roads, street lighting and bridge maintenance.'"

Your annexe states that none of that money was forthcoming. What impact does that have on the public's expectations? You talked about £724 million and increased public demand. Is a large part of that expectation concerned with road maintenance?

Yes. That is a question that is regularly asked; roads maintenance is one of the key issues—along with cleansing—raised at councillors' surgeries. The state of the roads and the emptying of bins are the two most common causes of concern. One of the key issues that we have tried to highlight in our submission is the need for more honesty from ministers who create the perception in local government and the hope among the public that additional resources are being put into the system, when in fact there are no additional resources.

So, there was no extra funding. Did the minister, as far as you are aware, try to ring-fence that money out of the existing core budget?

It is not ring-fenced at all. We have been told that it is within the single consent figure and that it has been issued to councils.

So it does not exist.

I am sure that ministers would argue that the overall capital consent has gone up. Perhaps that is recognised. However, the whole purpose of the single consent is that there is one figure per council and there is flexibility to deliver and spend within that figure. Now we are being told, in public announcements at least, that that one figure contains £70 million.

Do you think that the amount that has been stated in public announcements exceeds the amount that is available in the budget?

Yes.

May I clarify something? Is the £70 million capital that is available over three years?

Yes.

That was my point. We were talking about spending, not capital.

Apparently, Tony Blair has announced that the general election is to be held in a couple of weeks' time. The last few questions have got the campaign off and running in this afternoon's committee.

We are here to discuss not the level of the budget, but the budget process. What is your view of the process for passing information about what the Executive expects to happen and what you believe should be the case? Are you happy with the level of communication and with the performance indicators for monitoring the process?

As I said, the effectiveness of the process is linked to the local flexibility and discretion that is needed. We welcome the main thrust behind the budget process and the intention to open up the books, but it is still early days and the whole process needs to be refined. We would like to sit down with the Executive and discuss how it can be improved. The joint planning framework is one possible way of improving the current arrangements.

Michael McMahon was right to say that we are considering the process and not the budget itself.

The McIntosh report's whole ethos was about involvement. It talked a lot about COSLA as the representative of the 32 councils. Having spoken to other members of COSLA—officials and councillors—and to the Executive, I think that the process is beginning; ministers are more available than they were in the past. That can only be beneficial.

McIntosh also talked, as Norie Williamson did, about getting in much earlier to the consideration of budget decisions and priorities. I hope that that is the road that the Executive will continue to go down—listening and talking. We might not always get what we want, but at least now we have a platform for putting forward ideas.

I thank you for coming along. I am sorry you had to wait in such a warm room, but we cannot complain about the weather.

Comrades, we now welcome witnesses from Dundee City Council. With us, we have Councillor George Regan, the convener of the finance committee, and David Dorward, the director of finance. Mr Dorward will make some opening remarks, after which I will open up the session for questions.

We welcome the opportunity to give evidence to the Local Government Committee. All authorities welcomed the recent innovation of three-year budgeting. That brought stability, but it did not cure the funding problems at the heart of local government. We have been preparing three-year revenue and capital budgets for a considerable time simply because, with the second-highest council tax in the land, we have had to plan ahead to manage the situation.

First of all, I should say that there is not enough capital allocation to do the job on the ground. Norie Williamson mentioned the prime example of education and schools in his presentation. We need only compare our capital allocation for education—which is approximately £8 million—with the perceived need in schools; the amount of money that we need to carry out repairs and maintenance is considerable. We are not even talking about building new schools; that has not happened since the early days of the regional councils.

That is one of the reasons that Dundee City Council has considered PPP and PFI. It is not that we believe that they are the most cost-effective options for tackling the immediate need in schools in the short to medium term; it is that they are the only options.

We have been given additional grant aid to examine the feasibility of and outline the business case for a PPP scheme for schools. Since 1996, the council has continually rationalised its assets. In the first of those financial years we closed six schools, mainly to generate revenue savings. We had to find £18 million of savings in the first year, which was about 5 or 6 per cent of our budget. That allowed us to generate some capital receipts through the sale of surplus assets. We have continually considered the rationalisation of our property to generate capital receipts and maximise our capital investment. Alas, after six or seven years, that approach has to end. There are very few unutilised capital assets and we have sold almost all our surplus. Although we were penalised for a period for generating capital receipts, that is not the case now; we are starting to run out of opportunities to generate capital receipts.

The capital situation is bad enough, but the revenue situation is far more serious. The inadequacies of the grant distribution system meant that, in 1996, Dundee City Council had the second-highest council tax in the land. For three years, the mismatch between regional council expenditure and the amount in the GAE was allowed to continue, which pushed our council tax up from £701 to almost £930. The difference between the highest and the lowest council tax for Scottish mainland councils is £335.

Grant distribution may not be within the committee's locus, but we believe that the system is inequitable. Dundee City Council's council tax is £1,046—last year we brought it down by £10. We have a prime responsibility to the people of Dundee to try to manage the level of council tax. The administration has made a commitment that council tax increases over the next three years will be below the rate of inflation. That will prove extremely difficult, because we have already made cuts of more than £35 million in the council's first five years. Those cuts were mainly in the largest spending services, such as social work and education. Expenditure on police and fire services was not cut because there was a common feeling that the police should receive the GAE that had been allocated for that service. The expenditure cuts for the police and fire services have been minimal compared with those for the services provided directly by the council.

Whether they are called savings or cutbacks, cuts in expenditure are painful and have taken up a lot of elected members' time. Members feel that they did not come into local government to take that kind of difficult decision. During the council's first year, six schools had to be closed. Although many elected members found that painful, it was the only way that the council could save £18 million. Because we have made all those cuts, our options for further cuts and efficiency savings are reduced.

As Norie Williamson said, we have had to consider our income generation much more seriously. We have done that for the past two or three years and many savings have been made by increasing charges or introducing new charges. In some cases, the council is competing with the private sector, so it is difficult to introduce new charges or increase existing ones.

On expenditure, pressures that will be manifest in the next year or two have not been included in our three-year budget. Those pressures are not recognised by the Scottish Executive under the new burdens, but the pressures are real and will happen. The number of children who are placed in residential and secure accommodation has risen dramatically because of an increase in the number of placements made by children's panels and by the courts. The charges from individual schools have increased dramatically and will probably add £1 million to our spend, but that is not recognised in the GAE.

Other expenditure pressures come from the increase in employers' contributions and the change to advance corporation tax—which, at this point in time, has not fed through properly—which will add £1 million to our budgeted expenditure for 2002-03 that was not required in 2001-02.

The greatest pressure on spending will come from social work services. Delayed discharge from hospitals and the cost of community care are causing a steady rise in spending pressures.

Dundee has high levels of deprivation and poverty so our expenditure pressures are greater than those of other authorities. Those pressures are not adequately recognised in the present grant distribution. Given that the gap between GAE and present expenditure amounts to £700 million, one cannot say that Dundee City Council has an adequate level of resources. The teachers for deprivation funding is inadequate and there is inadequate funding for residential and secure accommodation.

Although the distribution of funding is an issue, there is without a shadow of a doubt insufficient funding in the settlement. We hope that the Scottish Executive will examine seriously the areas we have mentioned and ensure that there is adequate and appropriate funding for such services, many of which are demand-led and cannot be controlled by councils. We have little control over the number of placements that are made by children's panels and courts.

I will add a couple of general points to the specific points that David Dorward has covered.

Added to the considerable difficulties that David Dorward has outlined is the fact that the 1996 boundary changes meant that a large portion of the city's council tax income was lost. That income was defrayed to the other authorities, which had already gained from the mismatch, and created a greater disparity between Dundee City Council and the two other authorities, Angus Council and Perth and Kinross Council.

I mention that specifically because the effect of the boundary changes and of the deprivation in the city is that the population is falling by roughly 2,000 a year. Given that the age of those who leave for work and other reasons is generally between 18 and 35, a large proportion of expected income is running out of the city. To turn the tables on that alone would have an impact on council tax. At present, parents advise their sons or daughters who are about to be married to buy a house across the street from them and, thereby, save £300 a year. The cost of living in the city has been exacerbated by the water charges of the North of Scotland Water Authority, which were increased last year by 20-odd per cent. The charges were increased by a further 13 per cent this year, which again has had an impact on the cost of living in the city.

We are providing a regional facility. People will come from outlying areas to work in the city, pay their council tax at the local rate and be much better off. The problem of the dwindling base of money is spiralling.

In your submission, there is a slight contradiction between your concern about the under-resourcing of services in the city and your position on council tax. What is the council's priority? Is it to improve services and invest more in them or to keep council tax low?

It falls to me, as to other elected members, to wield the sword of Solomon. Neither option is one that we face through choice. As for the serious spends such as social work, it has reached the stage when I am having to say to colleagues that we will have to reduce or stop much-needed services. Because of the high level of deprivation, there is higher per head dependency on council services, as a result of which more people are required to provide such services. To take money from well-regarded services and then add insult to injury by making even fewer services available would create another problem. That, along with the rate of council tax, is a matter with which we live day to day.

We are working our way through the problem. It is difficult. We have met ministers and we will continue to work on it. PPP is being considered. For example, a couple of our schools are prefabricated and were built after the war. They were supposed to be demolished 20 years ago. We are working with what is there. We do not have any option. I would like to say, "Okay. We will cut 10 per cent of services." That would allow money for council tax, but we must bear it in mind that the council tax payer receives such services. A balance must be struck and we work on it daily. I would not make a recommendation on which route to take. We shall work it through as we go.

We want to focus on the council tax. There is no doubt that the drive of people from Dundee to the outlying areas is caused by the high council tax in Dundee and the relatively low level of council tax in surrounding areas. I am not talking about expanding services. No council has seen a growth in its services since 1990.

I was not suggesting expanding services. I thought that you were concerned with maintaining them. Reference is made in section 4 of your submission to the McCrone settlement and a projected shortfall of £0.5 million in 2002-03. How was that figure reached?

It is based on the reality of what the settlement will cost the council, given our knowledge of teacher numbers, placings and so on, and the calculation made by the Scottish Executive when the grant is distributed. I am not saying that the situation is consistent throughout all councils. Some councils may have been given a generous McCrone settlement. The position comes down to the distribution of the McCrone money and how that relates to what is happening in councils.

So the figure was reached because the Executive used the GAE formula to distribute the additional moneys and not because the total amount was wrong.

I was interested in the comments in paragraph d) on page 6 of your submission about the GAE for secure and residential care being significantly less than your spending. Does the opposite effect occur in other services? Do you spend significantly less than the GAE on some services?

I give a categorical no to that. Our spending is the second highest above GAE, so the GAE levels that we receive are all lower than our actual spends. Off the top of my head, I cannot think of a service on which we will not spend more than the GAE distribution. The situation is worse in some areas than it is in others. On police, we spend at the level of GAE, because we agreed with the joint police board to give it the GAE allocation. That is also the situation in the fire service. However, in other services, the difference varies. We are quite close to GAE in education, because that is based on teacher numbers—apart from the McCrone settlement—but in social work, cleansing, and leisure and parks, the differences are significant.

In the review of GAE, social work divisions in some local authorities challenged the significance of the children's panel effect. Will you submit numbers and costs on that for Dundee? You probably cannot give them off the top of your head, but you can write to us with the details.

I could make a stab at it now.

Could you write to us as well, in case the stab is out of line or changes a bit?

Three years ago, I believe that we were dealing with between 27 and 29 placements. We are now dealing with 41, plus four children whom we locate in a secure unit in the city, which we fund. The numbers have increased, and not just for secure accommodation. The figures include children who are placed in residential accommodation for their own safety, for example. The cost per placement has increased too, so some placements cost more than £100,000 per annum.

Perhaps you could write to us with a bit more detail. I know that some placements are as expensive as you say, but that might not be common knowledge. People might think that that is a lot of money for a placement, but it is not.

Section 3 of the council's submission concerns the adequacy of your non-housing capital allocation. I asked Norie Williamson a related question on that. I note that the city's non-housing capital allocation for 2002-03 is £8.409 million, yet its non-housing assets are valued at £428 million. What is the level of depreciation of those assets? Does it exceed the resources that you have to address your concerns?

I think that the level of depreciation is higher than £8.4 million.

So you are saying that rather than trying to catch up and cut into the £428 million, you are heading in the opposite direction.

We must remember that the present allocations cover everything from education to social work, roads, cleansing and leisure and parks. Many of the assets were built many years ago, as Councillor Regan said. As we must control our revenue budget on repairs and maintenance, the fabric of the assets is deteriorating to the extent that we must commit a large proportion of our capital spend to trying to maintain those buildings. That scenario cannot continue for a prolonged period.

Will you estimate what the level of depreciation is?

I could not give that information off the top of my head.

Can you give us a rough percentage? I will not press you if you do not have the figures.

The £8.4 million is roughly 5 per cent. I think that depreciation would be more than that.

Is not £8.4 million more like 2 per cent of £428 million?

I am sorry; I beg your pardon, that is correct.

I will move on to paragraph f) on page 7 of your submission, which says that

"Dundee City Council has been allocated £3m … in addition to the £2m allocated for"

this year from the better neighbourhoods fund. You are concerned about a lack of flexibility. What flexibility would you look for to make best use of the resources?

At present, the criteria for better neighbourhoods funds are reasonably restrictive, in that they cover social inclusion partnership areas, and there is a community limit of £10,000. We need more flexibility to deal with particular sectors, groups or themes so that, for example, we can deal with children or elderly people throughout the city. Under the present criteria, we do not have that flexibility. These are early days—I do not think that anyone has made a submission for better neighbourhoods funds yet. We certainly have not, but the criteria have been issued. At this time, they are far too restrictive and do not allow local authorities to take better neighbourhoods spending to as wide an audience as possible.

For some years we have run the social inclusion partnerships system with some success. However, because the boundaries that we have to deal with are not natural—they are artificial—the perception in areas that immediately adjoin improved areas might be that the exercise has not been balanced. The system has worked well, but the lack of flexibility has caused resentment in some communities, because they see money being directed to specific areas, albeit bad ones, which reflects on adjacent areas. There is not sudden change from estate hell to a lovely neighbourhood; there is a blending. To direct the system along false geographical and developmental lines can result in restrictions and it can cause friction, as well as inequalities.

On section 4 of your submission, Iain Smith raised the issue of secure and residential care for children. The GAE of £0.5 million compares with an actual expenditure of £2.6 million—that is a massive differential. How could the GAE be so wrong, and is there any indication that that will be addressed in the not-too-distant future?

It is not a new burden as per the definition of a new burden. We will make representations to COSLA, which will make representations to the Scottish Executive. What happens thereafter is in the lap of the gods. We have given figures for 2000-01 because the GAE for secure and residential care for children has been subsumed into a wider social work GAE, so it is impossible to tell how much of that element the GAE is dealing with. If there is no increase in the GAE, we definitely will have to increase our budget in 2002-03, because we will get no corresponding increase in grant to reflect that increase in budget. We will be back to the gearing effect and the council tax, because every pound that we add to the cost of secure and residential care will be added to the council tax, the increase in which we have committed to keep within 2.5 per cent. We have a serious problem, which can be addressed only by additional grant or by making cuts in services.

As well as the number of referrals increasing, the duration of referrals is increasing, which has a direct effect on cost. Previously a kid would be sent away for four weeks, but now they are being sent away for seven weeks. You can imagine the effect that that has on the cost. This area is demand-led and we have no means of controlling it. We must just spend the money as it is demanded.

Why is the GAE so out of kilter with the realities?

In the past three or four years, we have seen a dramatic rise in the number of placements. It might simply be that the GAE is an historic figure that goes back further than three or four years. The mechanism for GAE is continually reviewed. A work programme is in place to review certain areas, but I do not know whether that programme, when it has examined residential and secure accommodation for children, has ever reflected the actual spend on the ground. Currently, it does not. The low GAE is an historic issue that we have inherited.

So, are you saying that the GAE system is totally inadequate in this regard and that it is not flexible enough?

That is very general—

But on secure and residential care?

On that, the GAE does not reflect the current level of spend in our council.

What impact have the budgets had on staffing levels over the past four years?

If we go back to 1996-97—the first year—there was quite a large effect because establishments closed, obviously. We therefore had to let staff go through voluntary redundancy and so on. More recently, budget savings have not had the same effect. I do not think that we have reduced staff numbers because of budget savings in the past three or four years.

You have not reduced staff numbers?

I do not think that we have as a result of budgetary issues.

Staffing accounts for about 70 per cent of the local government budget, so how can you reduce services but not reduce the number of staff?

We have said that we are struggling to maintain services; we do not want to reduce them. Demand is increasing in many services. With an increasingly elderly population, demands on social work are increasing. We are managing to keep services steady and not expand the number of staff. Dundee is a city in a regional setting. The amount of money coming in is not increasing, but the demands are increasing. The figures are often misleading. Efficiencies have been made, but I believe that there are no means of reducing the present staffing levels without seriously affecting the quality of services. With the high demands on social work and education, it would not be desirable to attempt to reduce staffing levels.

I am sorry, I misunderstood. I thought that, in your response to Iain Smith, you had said that you were reducing services, so that is why I took up the issue.

Gil?

Thank you, convener—and I am sorry that I was so rude to you earlier. I really did not mean to be.

Page 7 of the council's submission talks about the impact on the council of the loss of the trunk roads contracts to the private sector. Can the witnesses quantify that loss? I am not sure what the paragraph actually means.

Within Tayside, we have Tayside Contracts, which has a joint committee involving the three local authorities in the area. Previously, the three authorities' roads maintenance—including trunk roads maintenance—was done by Tayside Contracts. Any surplus that was generated by Tayside Contracts was disbursed back to the three authorities in proportion to the work loads that were generated. In the previous three financial years, profits in excess of £1 million have been returned to the local authorities. I have spoken to the managing director of Tayside Contracts and he expects that those surpluses will diminish, but he cannot tell by exactly how much they will diminish. The three councils have all set their 2001-02 budgets on the assumption that there will be an overall surplus of £1 million. If the trunk roads factor comes into play, and if the managing director's information is correct, all three councils will have to reduce their estimates of income from Tayside Contracts in 2002-03. That will obviously have an effect on the budget and council tax.

Thank you for a very clear presentation, which makes things easier for us. This is a very complex subject. We are looking at the budget process—not the budget itself. One or two of us were, in a past life, councillors in Glasgow. We understand the points about the continuing impact of boundary changes on the council tax. Perhaps once the committee has finished its deliberations on local government finance, we will find time to have at least an overview of the boundary changes and where they should take place. That issue will come up in the Parliament at some point before 2004.

I thank the witnesses very much for attending and apologise that they have had to sit in a very warm room.

Before you go, I would like some clarification. When you were asked what the difference was between the budget and the GAE, you said £700 million—that was Norie Williamson's figure. A Dundee City Council figure would be helpful. If you do not have one, you can write to us.

The figure will be around £18 million, £19 million or £20 million. It is about 10 or 11 per cent. I think that that is the highest figure in Scotland. It is not a situation to which we aspire—it is down to the calculation of the GAE.

I welcome witnesses from Orkney Islands Council. I apologise for the hoarseness of my voice.

Councillor Hugh Halcro-Johnston is the convener of Orkney Islands Council and David Robertson is the director of finance.

I thank the convener and the Local Government Committee very much for allowing us to give evidence. I also want to thank the committee for allowing us to present our evidence today, rather than next Tuesday, when there is a key council meeting at which the chairs of the committees and other appointments will be made. I should be there.

Largely for that reason, we have not been able in the available time to submit a written statement ahead of the meeting. I apologise for that, but David Robertson will be very happy to answer questions. We will answer questions to the best of our ability and provide detailed information immediately after the meeting.

I will set the scene. Obviously, Orkney Islands Council is a very different council from that which the committee has just heard from. Orkney Islands Council is the smallest local authority in Scotland. It represents and attempts to care for a total population of fewer than 20,000 people. The population is scattered over a very wide area that includes 18 inhabited islands. That presents problems in the provision of local authority services. The review of the special islands needs allowance has largely recognised such problems and lumped them under the heading of islandness. Islandness can be used to cover a multitude of issues, probably the most important of which are transport and the provision of services to a scattered community.

I would like to refer briefly to the special islands needs allowance. As the smallest authority in Scotland, we are possibly less concerned with issues of total provision—which the committee heard about in the last two submissions—than we are about how that provision is distributed, particularly in authorities such as ours. SINA was introduced to address that problem in particular. The need for the allowance was recognised long before reorganisation in 1994. At that time, the distribution formula appeared to work adequately for the nine large regional authorities but it was recognised that it did not work for the three unitary island authorities. A compromise was needed to deal with that issue.

The special islands needs allowance was reviewed last year by the distribution committee using a panel of experts, who identified the islandness factor but also mentioned two other important factors that they believed that the SINA addressed: supersparsity—the scattered population—and the diseconomies of scale. As those factors were not addressed in the review, its findings were not implemented in relation to the present three-year settlement. That has caused us considerable concern, mainly because the islandness issue went only a very small way to addressing the total amount of funding that was available through SINA.

Supersparsity is fairly easy to understand, especially in relation to a place such as Orkney. If we include the sea areas, the total area we cover is greater than that of East Lothian. At the same time, we suffer from remoteness in that the nearest real commercial centre, Inverness, is 150 miles away and involves a two-hour sea journey.

Diseconomies of scale are perhaps even more of an important issue for us. As a local authority we are expected to provide—and indeed we seek to provide—for all our inhabitants the same levels of service as might be expected in the larger conurbations; yet some of those services have to be provided in very small island communities where, for example, the school population could be in the single figures.

That problem has been compounded by the increasing tendency to ring-fence funds so that, where those funds are made available to individual authorities on a per capita basis, the amount of money we receive for a special service is often small compared with the amount received by other authorities. Indeed, it may not be enough to employ a full-time person to deal with that special service. Sometimes we are simply unable to take advantage of those funds to provide services in our authority area.

I want to address what I hope is a misconception but which is certainly a perception—that Orkney can be seen as a rich authority. That is largely the result of the financial reserves that we have built up as a result of our involvement with the oil industry over the past 20 or so years and the fact that we have the second lowest council tax in Scotland. My authority's position is that those two issues are separate and should not be allowed to impinge on each other.

To deal with the oil-related financial reserves first, those have two purposes. The first purpose is to develop businesses and an economy within the islands to replace the oil industry, which is seen as having a finite duration and which will create just as many problems when it leaves as opportunities when it arrived. The second purpose of those reserves is to handle the difficult transitional arrangements for the harbour, which has to continue to operate for an oil industry that is running down in terms of throughput, and to help us to face the problems of decommissioning the terminal at the end of the lifetime of the fields that it serves.

That is on the one side; on the other side we have the general fund. We have managed to build up fairly substantial reserves in the order of £22 million. Those reserves are separate from the oil-related financial reserves. They have been built up as a result of prudent budgeting over a long period and are used to support the council tax to the tune of about £180 on a band D property. If that support were not available, our council tax would be above the Scottish average.

Historically, Orkney has been a low-spending authority in terms of capital and that, in itself, is creating some problems for us with the level of loan support that we now receive. PFI and PPP have been tried, but they do not work in our community. The private sector is not interested in the schemes with which we would like its help. We are entirely dependent on what we can do for ourselves.

As for section 94 consents, we welcome the 20 per cent increase in the current round, but unfortunately it is not adequate. For example, over the next seven years, we shall be facing a cost of £34 million to replace our inter-island ferries. At present, we do not know where that money will come from unless our consents can be improved.

I shall end my remarks on a positive note. Orkney has great natural advantages. We have the great port of Scapa Flow and an enterprising economy, an example of which is the highest concentration of jewellery manufacturers outside of Birmingham. We are pursuing enthusiastically community planning and partnership with our partner agencies in Orkney and we believe that that will deliver considerable savings. It is not all gloom and doom.

Thank you. I shall now take questions.

My question is not so much about the presentation, but about what David Dorward said earlier when he referred to the process of discussing individual councils' circumstances. He said that he had to rely on COSLA to negotiate for the Dundee City Council and that matters were then in the lap of the gods. If that is how matters operate, do you agree that there must be a fundamental flaw in the system?

I should like David Robertson to answer that question as he is a member of the distribution committee.

We do not rely completely on COSLA. All councils have the opportunity to approach the Executive individually as we did last year. However, although we were listened to sympathetically, nothing much happened when the settlement was finally announced.

I accept that the system is not exactly the same as that outlined by Dundee City Council, but there are still flaws within it.

We must accept that there are rules to play by in every system. Orkney Islands Council plays by the rules in that we raise issues through the distribution committee. However, if it were felt that such action was not going anywhere, issues would be raised politically, which is what we did last year.

Is it a one-way negotiation process? Do you consider that there is a genuine dialogue and that you know exactly what the Scottish Executive expects from you, but that it does not know what you expect from it?

It is a difficult position. We have our own problems. As we heard earlier, Dundee has its difficulties. We consider that ours are paramount, but we accept that, when looked at in the round, other issues could take precedence.

Everyone complains about ring fencing, but I was interested to hear that your complaints were different in that, because of the scale of numbers, you lose out. Can you quantify that statement with figures? It sounded as though that happened frequently because you have low numbers.

On several occasions, we found it difficult to take advantage of the excellence fund because the amount of money that we would receive under a particular heading was not enough to warrant setting up the administration for that fund. Small authorities such as Orkney face such problems. Because we are so small, we need—perhaps more than larger authorities—the flexibility to move resources between funds to take maximum advantage, while not in any way, I hope, necessarily moving against the Executive's targeted ideas.

Is there any light at the end of the tunnel? Always losing out because the authority is so small is a horrendous situation to be in.

We hope that the representations that we are making directly to the Executive—a fairly influential MSP helps us in such matters—and COSLA, of which I am a vice-president, will eventually produce sanity and sense at the end of the tunnel.

Councillor Halcro-Johnston expressed his concern that the full SINA improvements have not come through. Is the current arrangement sufficient in circumstances when, for example, proposals such as the McCrone recommendations take account of the special needs of the islands and money is allocated? Or does it create the same problems as those encountered with the excellence fund?

I shall pass that question to David Robertson.

The review of SINA is incomplete. Until the review of supersparsity and economies of scale is finished, the Executive has decided to freeze the level of SINA. That means that there will be no increase in a certain element of our aggregate external finance. In 2001-02, that will cost us about £322,000; in 2002-03, it will cost us £257,000; in 2003-04, it will cost us £191,000 simply because the review is not complete and the SINA element will not be increased within the grant-aided expenditure system.

That takes me back to my specific example of McCrone. How will Orkney and the island councils in general come out of the McCrone settlement? Will they receive sufficient to meet their needs, or does the current distribution problem mean that they will lose out?

The current distribution system under the McCrone settlement means that we lose out. It is based on pupil numbers. Teachers' salaries are increasing. We have smaller schools, so we need more teachers.

Councillor Halcro-Johnston mentioned in his presentation that Orkney is currently subsidising the council tax from its reserves to the tune of £180 per annum. How long can the council continue that level of support? How do you plan to deal with it when you can no longer afford to subsidise the council tax?

Fortunately, at that level, we can continue indefinitely. We are using the interest on a £22 million fund to support the council tax and, as a prudent council, we have made it a deliberate policy to ensure that the fund increases in line with inflation.

l am pleased to hear how the Orkney Islands Council operates. Small councils are often innovative councils, and Orkney is certainly that. Small can be beautiful in local authority terms. Councillor Halcro-Johnston touched on several disadvantages—I accept that all local authorities believe that they are disadvantaged—but are there any other major worries that you consider should be dealt with?

I did not want to add to the presentations made by COSLA and Dundee City Council, but we share many of their concerns. Our particular worry is that of an increasing aging population. Our key political priority is caring for our old folks and, wherever possible, caring for them at home, which sometimes means providing services for small island communities. It will come as no surprise to people here that that is becoming a more expensive process. We are struggling with it at the moment and if we do not generate the resources to enable such a service to be provided satisfactorily, we will let down those whom we represent and contribute to the great social malaise in the islands of depopulation.

Is your main argument about the distribution of resources or the size of the entire cake?

Our main argument is about distribution. That may be very glib and easy for a small authority because we take only a very small bit of the entire cake. We are on the edge in every sense: geographically and in terms of our ability to provide services to some of those communities. We are asking for those special issues—the sort of issues that we hope that the SINA review will address—to be addressed.

I wonder whether you have had any dealings with the Executive about agreed measurement of outcomes or outputs. You seem to be saying that you do not fit at all with what a prominent gentleman in England referred to as bog standard council arrangements. Have you discussed with the Executive the possibility of being a leading light in getting the new arrangements up and running?

Thank you. We certainly want to avoid being a bog standard council—and we have not been accused of being such so far. We have not had any direct discussion with the Executive. However, that is a key element of the community planning process, which, as I have indicated, we consider to be central. Orkney has already set up active dialogue with the different agencies. We see the measurement of outcomes as a key element in determining the way in which community planning progresses. Rather than asking the Executive to set outcomes for us, we would consider the process as one in which we would identify outcomes with our partners, and then ask the Executive to fund them. We believe that that would give us a stronger case.

I have two points of clarification. Is your general fund used to reduce the council tax from your oil revenues or from the balance?

No. We have tried to make a clear distinction between the general fund, which does not contain oil revenues as such, and the financial reserves that have been created as a result of the oil business in Orkney. The financial reserves are kept quite separate and are used for economic development. The reserve fund, which sometimes gets confused, even in Orkney, is a contingency reserve, built up through the general revenue fund. All councils have such a fund, but we happen to have quite a good one.

Thank you. You heard the evidence from Dundee City Council about the large numbers of children coming through the children's panel, who had to be put into some form of secure accommodation, sometimes costing as much as £100,000 per child. Is that a problem for Orkney? Do you have a significant figure in your social work budget to address that?

That causes huge problems for small authorities such as ours. Just one child costs £100,000 and £100,000 as a percentage of our budget is much larger than £100,000 as a percentage of Dundee City Council's budget. It throws the whole budget into chaos.

Do you have a significant number of children for whom that is necessary?

No. We do not have a significant number of children in secure accommodation at the moment. Earlier on there was discussion of the savings that certain authorities were making. This year we were quite fortunate in that one of the children that we had in an off-island placement—as we call it—was no longer required to stay there, so we could cut back on that element of the budget. There is no guarantee that that will continue for years to come.

It is fairly well known that we have not been without our children's problems in Orkney.

I appreciate that.

In your opening statement, you said that there were no rich authorities. Having listened to the evidence, we agree with that—or if there are rich authorities, they are not telling us. As a member of the committee who visited other island councils, I understand the difficulties that such councils have with an aging population who will always wish to remain. If that is what people choose, that is what should happen. I am sure that there will be difficulties with that budget line.

Thank you for coming today. I am sorry that we kept you so late. We have had a marathon session.

Thank you.

I am sure that we will think up some excuse to visit Orkney.

You will be very welcome.

I was interested in the comments made by Dundee City Council on the variation in council tax levels in Dundee. Perhaps Professor Midwinter could give us a comparison of average council tax bills, rather than simply band D council tax.

Professor Midwinter has agreed to prepare a paper on that for next week.

Meeting adjourned until 17:29 and continued in private until 18:00.