Local Government Committee, 31 Oct 2000

Meeting date: Tuesday, October 31, 2000

Official Report 277KB pdf

---

Budget Process

The next agenda item falls into two parts. First, we have the Scottish Executive; we will then speak to Professor Arthur Midwinter.

We are joined by Christie Smith, head of local government finance in the Scottish Executive development department, by Neil Rennick, head of the local government finance expenditure branch, and by Don MacDonald, who is in the finance co-ordination unit. The format will be the same as usual: we will hear from the witnesses and then ask questions.

I understand that the original focus of this meeting was on the impact of resource accounting and budgeting on the presentation of the local government figures in "Making a Difference for Scotland: Spending Plans for Scotland 2001-02 to 2003-04" and its predecessor document.

I wrote to the committee yesterday to set out the position: although there are small differences between the two documents in the make-up of the figures, those are not accounted for by resource accounting and budgeting, which has no impact on the presentation of local government figures.

Because there is no impact, I feel that I have no more to say on that aspect. My colleagues and I will be happy to answer any questions or to comment on other aspects of the figures that members may be interested in.

What is the reasoning behind the Executive's decision to adopt RAB?

I will ask Don MacDonald to answer that, as it was his responsibility to implement RAB.

The basic principle behind resource accounting and budgeting was to apply to Government accounting the principles that apply to the rest of the economy. The previous Government system was based on cash, which had the advantage of being fairly simple and understandable. Under that system, departments planned and accounted for cash as it passed through their books, irrespective of when it was spent or when the items purchased were to be used.

Resource accounting and budgeting introduced the accruals accounting concept to public spending. That meant that it matched payments and receipts to the time period when the costs were incurred, rather than to when they were paid. It also recognised the non-cash costs of Government activity, for example the consumption of capital assets throughout the year—assets may not have been bought in a given year, but some of them may have been used up. RAB allocated part of the cost of the asset to the year in question. That is a very broad outline of the basic principles behind RAB. I am happy to deal with specific, more detailed questions.

Was there any reason why the Executive made the change? Was it because central Government accounting was coming into line with—

Yes. Resource accounting and budgeting was introduced across the whole UK by the Treasury. Moves to do so began before 1997, and RAB has now come into practice.

I would like to ask a wider question about local government finance. The latest Executive announcement of additional expenditure allocated to the various departments included what seems to be a significant increase for local government. It is difficult, however, for people in our position to tease out certain things.

If we accept that some parts of local government activity receive a significant amount of extra money and that, within limits, each council can make its own arrangements, can we be confident that there will be no further cuts in areas such as libraries, recreation, youth work and support for voluntary organisations, whose funds have been repeatedly cut in previous years? After the specific increases for the more important and attractive areas of activity are subtracted, will the overall increase still leave enough for increases, or at least no cuts, in other areas?

I must preface my reply with the usual caveat that it is up to each local authority to make decisions on budgets in each service area. However, the increased sums are substantial and, by and large, are not hypothecated to any particular service. In the past, we prioritised local government services within the settlement. Although ministers have yet to decide on the final form of the settlement that will be announced later this year, we do not envisage that a similar approach will be taken. Local authorities will have the freedom to deploy resources as they see fit. It was certainly the intention behind the global settlement for local government that authorities should be free to boost, if they so choose, the sort of services that Donald Gorrie mentioned—what might be called local services.

Many committee members get around and I have been concerned by what I have been told about a number of councils instructing their officials to find further cuts in the coming year. I just wondered whether they knew something that we do not know.

I do not know what the councils know. There is presumably always a case for making savings if they can be made, as they can be turned to account elsewhere. However, no such suggestion underlies the announcement.

I am sorry to return to one of my old hobby-horses, but I will illustrate it with an example from my constituency. Many years ago, a swimming pool in Invergordon was sold and a capital sum of hundreds of thousands of pounds was paid over into an account. That money is still there, but cannot be spent because it counts against section 94 of the Local Government (Scotland) Act 1973, which affects the council's capital budget. As I understand it, section 94 was introduced to control borrowing. However, we are talking about a real capital balance that is being held and that is, in effect, frozen for all eternity. Alongside that, a rule stipulates that, although one can spend capital from current revenue in the current year, it cannot be carried over into the following year. We are talking about real money, not borrowings. I have often thought that councils might be helped if those rules could be tweaked or the controls freed up. Mr Smith, I have asked you before and will ask you again about the Scottish Executive's plans—if there are any—to examine this particular and rather detailed problem.

We are reviewing the future of section 94 controls with COSLA and we are considering other options. On the immediate horizon, there will be substantial increases in central Government support for capital expenditure by local authorities as a result of the spending review. We are reviewing what are known as the receipts rules, which are agreed with COSLA and require a proportion of each council's capital receipts to be pooled for distribution to other councils. We hope to announce three-year capital allocations for councils this year. I am not quite sure how your council's position in relation to Invergordon will be affected by that; however, there has been substantial movement and we are committed to examining the future of the section 94 arrangements.

Might any review include situations where actual capital balances are held but are boxed in by section 94 rules? One can understand that having large sums of money sitting in perpetuity doing nothing, apart from earning interest, does no good to anyone. In fact, a change in the rules could serve the Scottish Executive's interests by helping to keep a control on borrowing.

I am not familiar with the case that you mention, but I know that the Executive does not prevent councils from getting receipts and using them. It may be that in this case the council thinks that the money will count against a future allocation and is reluctant to use it. We will certainly be reviewing the rules on receipts in the capital allocation system. That may solve the council's problem.

I have one more supplementary.

Well—

I will shut up.

We have to remember why we invited the Executive. We asked Executive officials to explain the implications of resource accounting and budgeting. They should not find themselves having to answer a question that would more appropriately be addressed to the minister, who will be with us this afternoon.

I now call Bristow Muldoon—I will be listening carefully to his question.

Thank you, convener—I was going to say minister, but that is perhaps for a future date. My question does not relate to resource accounting and budgeting, so I will save it for the minister.

If it is any consolation, I will be back here later this afternoon with the minister. It is not out of the question that he might refer some questions to me.

Let us hear the question.

My question is on a technical matter rather than on policy, so it might be better if Christie Smith answers it. The COSLA distribution committee met last week—I do not know whether the Executive was present at that meeting. Has the Executive considered the recommendation that was reached at that meeting, which was that there should be no ceiling on increases in grant-aided expenditure this year, but that there should be a floor for any councils experiencing reductions in GAE? In effect, COSLA's proposal was that such reductions would be compensated for by all the councils, whereas in the past only those few councils whose GAE increased funded the safety-net regime.

The meeting to which Bristow Muldoon referred was an internal COSLA meeting, in which the Executive was not involved. When ministers met COSLA on 11 September, they received a number of recommendations from the working group, of which the recommendation that Bristow Muldoon outlined was one. The Executive and COSLA are now consulting internally on which of the options they would prefer in the final package. Ministers will meet COSLA again on 15 November, when I hope they will bring this matter to a conclusion so that there is a new structure for the settlement that is to be announced in December. We do not have a formal position on that, although we are aware that COSLA has reached a view on it.

Kenny Gibson.

There is no point in having a dress rehearsal, so I will wait for the minister.

I thank the witnesses for coming. We will see them later.

Okay, comrades, we welcome again Professor Arthur Midwinter, who helped us with stage 1 of the budget process. He is here to help us to consider the implications for local government of the Executive's most recent budget announcement, which was made on 20 September and is detailed in "Making a Difference for Scotland: Spending Plans for Scotland 2001-02 to 2003-04".

Welcome, again, Professor Midwinter. You are becoming a familiar face to the committee. We will be hearing from the Minister for Finance and Local Government this afternoon and members have a written report from COSLA. We will stick to the format that we have used at previous meetings. We will invite you to speak for a few minutes before we ask questions.

When we last met, I raised concerns about some developments in recent years: the restraint of central grants; the efficiency assumptions over pay; what I saw as an imbalance in the treatment of local government as compared to the Executive's programme; and some of the on-going structural problems in the local government finance system.

I regard developments in the past six months as welcome progress. As a result of the 2000 spending review, there has been an important shift on a number of the issues that I mentioned. There has been a real increase in grant, as calculated by the gross domestic product deflator. Ministers have recognised the need for that to make allowance for what are termed inflationary pressures, which are not solely to do with pay. In the work that I am doing for the Finance Committee, I am examining the possibility of generating separate deflators for the different programmes. It is welcome that it is now recognised that there is likely to be a pay cost this year.

The provision for spending growth for local government is broadly in line with the programme as a whole—I make it 20.4 per cent over the planning period compared to 21.9 per cent for central Government. That is much better than the figures that we saw six months ago when the local government increase had been roughly half the total for the programme as a whole. As a result of that increase, there may be greater stability in council tax levels compared to the figures that we examined last time. I have seen no projections for council tax for Scotland, but the figures in the UK comprehensive spending review, which contains data for UK local government, suggest a growth in council tax of about 14 per cent over the period. If that comes off, that will be an important change from the situation in the past five years.

You will be aware that the comments that I made to the committee last time I also made in a submission to the minister. I suggested that the consultation process appears to be working. The concerns of this committee were expressed at a meeting of the Finance Committee in July and it seems that there has been a response to those concerns. When I drafted the memorandum and suggested that you might want to ask the minister certain questions, I did not know that he would appear before the committee 10 minutes after me.

One of the concerns that I raised last time was the problem of convergence and the long-term objective of trying to bring the council budgets in line with grant-aided expenditure. The documents this year suggest that there is considerable provision for spending growth and services such as parks and leisure and recreation are mentioned. Of course, over the past couple of years, there has been no growth in the revenue support grant in those areas. We need to be clear whether the minister is saying that even authorities that are spending substantially above their GAE on those services can assume that it will be in order for them to increase spending on those areas. That is because the excess for those programmes in the GAE last year was around 30 per cent—councils were already spending substantially more than the GAE figures.

You will know from our previous discussion that I have reservations about using GAE prescriptively. The table that I have produced gives the percentage by which each council currently exceeds its GAE. It is disturbing that, five years after reorganisation, the authorities that suffered from what was known as the mismatch effect are in roughly the same position—some 10 to 12 per cent above their GAEs. That gap is unlikely to close. There will be a process of grant simplification over the next two or three years. That should be welcomed, although we have not yet seen the final details.

Grant simplification and the relaxation on spending should be considered jointly to discover whether there is some way of giving realistic figures for those councils that are suffering from the mismatch effect. I have suggested using a Barnett-style approach. At the moment, GAE is calculated and then adjusted. A guideline figure is produced for each council, which is closer to what the councils spend, as opposed to their GAEs. It would be better to reverse the process—begin from the point that councils are at and produce a target from that point. At the moment, we have unrealistic gaps between GAE and spending.

The current suggestion on efficiency is that councils should be able to generate recyclable savings—I heard COSLA use that phrase last week. It would be an advance if those figures were not included in the spending settlement. However, authorities were given them as targets, which would be monitored through the audit process. The authorities should be allowed to choose whether to spend the money on service development or to give council tax rebates. That would be a good way of giving back greater political choice to local government and it would provide an incentive for making efficiency savings.

There has been progress in the right direction. The GAE system is under strain and I believe that the high level of grant that authorities receive is a problem. That will not be addressed in the Executive's review of local government finance. However, compared with how I felt six months ago, I am reasonably optimistic.

Thank you for your paper, which was very useful. All the documents and papers that you have submitted are thought- provoking.

You recognise that there has been a significant increase in funding. Have you carried out any analysis of the likely level of the increase after the effects of McCrone are taken into account?

The decisions on the costs of McCrone have not yet been taken. Sensibly, such an analysis could be carried out only after they have been taken. Even allowing for McCrone, there will be some element of real growth. The forward projections are based on the GDP deflator, which is the best indication that we have. However, they represent an approximation. If McCrone were to trigger other settlements in local government, through the bandwagon effect, there would be fewer resources for developing services. At this stage, all one can say is that there is now a provision for real growth where there was not one before. However, we cannot say precisely what the figure would be. It would be unrealistic to give a percentage.

I want to be clear about the table. Does the 1995-96 figure show the amount by which the new council exceeded its GAE?

No. In that year, a paper went to the distribution committee, which examined the potential budgets of the new authorities. The working group that was considering the issue compared the inherited budgets of the new authorities with their likely share of GAE. The calculations were not based on the first budgets that the authorities set, which were issued in the following year. Dundee City Council is at the top of the league; this committee does not like league tables, so perhaps we should say that it is at the bottom of the league. The authority is not there through its own efforts. The disaggregation of the Tayside regional budget—where the Tayside region was spending its money—meant that the new Dundee City Council inherited a budget from the two old authorities that was 2.2 per cent above the level of its likely GAE. This calculation was made on the basis of figures for the year before councils first set their budgets. It was used to decide what sort of safety net was necessary.

This was a general problem for most of the cities. As members can see, the four city authorities appear in the top 10. There was a tendency for many central services posts to be passed to the cities as the biggest inheriting authorities. There has not been much change since that time, except that the authorities that theoretically did well out of reorganisation and inherited surpluses—those at the bottom of the table—have been spending up. I hesitate to use that phrase, but the figures suggest that that has been happening. There has been growth in the services in authorities in the bottom part of the table. As some members will know from experience, Dundee City Council and Glasgow City Council made major cuts over the period that we are dealing with. However, their spending is still 10 to 12 per cent above GAE—the notional figure that the Executive thinks councils should spend on a service. That suggests that a problem is built into the system and will not be eradicated through convergence on GAE.

So the 1995-96 figure was a notional figure, whereas the 2000-01 figure indicates the real excess.

Those are the latest figures, which were published last month.

So in Dundee, for example, there has not been any shift. The council thinks that it got a raw deal at the time of disaggregation and it is still in the same position.

Yes. The council has made savings. However, most of the authorities at the top of the table have a declining population, so in addition to the shortfall that they inherited they have a declining grant. Even making savings in an effort to meet the guidelines would leave their spending substantially above GAE.

Before I call Gil Paterson, I would like to ask you about that. Last week, COSLA decided to revisit the fact that a declining population means a decline in grant, even though it may not mean a decline in deprivation. I am thinking of cities such as Glasgow and Greenock. Those areas have a declining population, which means a decline in grant. COSLA felt that deprivation levels were not being considered and decided that a different approach was needed. Do you have any knowledge of that?

I am not privy to the discussion. Are you referring to the report in today's papers?

Yes. I was at the meeting of COSLA last week where this was decided.

Presumably COSLA was adopting the line that it intended to take when negotiating with the Executive, which will make the final decision on this matter. I understand that the Executive is considering a simplified way of allocating resources for years 2 and 3 of the current settlement. It could be based simply on population or on five or six indicators. The problem with having five or six indicators is identifying a rational basis for determining their relative weight. Under the client-group method, there is a statistical way of allocating resources. If five or six indicators were used, allocation would be determined by the judgment of the Minister for Finance and Local Government. However, I think that the Executive is moving in the right direction. The steps that it is considering would produce a degree of stability in allocations to councils and would be better than applying GAE figures to whole budgets. Does that answer your question?

I just wondered whether you had any thoughts on the matter.

Taking those steps will provide greater stability.

Yes, it should.

The measures do not go as far as I would like them to, however.

Thank you for your paper, which I find easy to understand—I am a bit thick, you see. It is a brighter paper than the previous one: it is more upbeat and I think that you are patting somebody on the back.

Now that he has gone.

Paragraph 2 of your paper implies that more needs to be done. Paragraph 5 says that

"the Executive remains committed to maintaining NDR in real terms, which will put additional pressure on council tax."

Can you quantify what that pressure would be?

The pressure would depend on the final decisions and the small details. As I understand it, non-domestic rates will rise in line with inflation—they will be maintained as they are in real terms. If the spending settlement suggests real growth higher than the level of inflation, that will be funded wholly from either increased grant or council tax—probably from a combination of both. By contrast, if NDR, grant and council tax were allowed to grow in line with the settlement, the pressure on council tax would be reduced. However, it would be wrong of me to try to quantify that without conducting further research on it.

I cannot remember for how many years NDR has been kept in line with inflation, while council tax has not, with the result that council tax increases have been consistently higher than non-domestic rate increases. I can say that maintaining NDR in real terms will put pressure on council tax, but I would not want to comment further without seeing more detailed assumptions. At the moment, we have only level I figures, which are global ones rather than a breakdown.

There are always uncertainties in local government finance. We do not know whether there are going to be balances this year. Council tax can be affected in a number of ways, and if balances were available, one of the advantages of the new system would be that all the balances could be used to reduce the council tax—focusing only on the council tax. When people make predictions about the percentage increase for next year, the only thing that I am sure about is the fact that those predictions will be wrong. People make predictions every year. For years, ministers have said that the average increase should be 5 per cent, but it is usually 7 or 8 per cent, as there are things that cannot be predicted from the global sums.

Without wanting to quantify the pressure, I assume that, if non-domestic rates were allowed to increase in line with the figures in the settlement, that increase would be higher than inflation and the pressure on the council tax and the grant would be less.

I understood that, in recent years, the effects of the rises in GAE and the levels of the guidelines had resulted in several authorities reducing the gap when they stood in excess of GAE. However, comparison of the mismatch now with that of 1995-96 does not seem to suggest that. Was there a jump in the decline among some authorities? On several occasions, West Lothian Council has indicated to me that, over the three or four years, it has experienced a declining proportion of GAE.

Sorry? It has experienced a declining proportion of GAE?

It has experienced a declining proportion of expenditure over GAE—the excess has reduced over recent years. However, these figures do not seem to suggest that.

The total excess has been growing consistently since reorganisation. It was 1.5 per cent at reorganisation and it has risen every year. This year, it is roughly the same as it was last year, which is about 7 per cent. Things may change for individual authorities, but guidelines are not substitutes for GAE. GAE exists, but guidelines are given to a council as a target for spending. There is often confusion, even among local authority people, about what is GAE and what is a guideline. I was travelling back on a train recently with a senior councillor, who told me that his council now spent at GAE, but what he meant was at guideline. In fact, his council was more than 10 per cent above GAE, so if a finance chairman does not understand it—

I am clear about this. Recently, I had a conversation with the chief executive of West Lothian Council. He showed me graphs—I cannot remember the precise figures—that indicated a downward trend over three or four years in terms of the percentage of excess over GAE.

Of course, I do not have the in-between figures in my report. What you say may be the case for that council, but it does not suggest that over the five years there has been much change in its position. Where it is, and what happened to its GAE, depend on the decisions that it took this year. If it "lost" in the GAE for last year, that would be reflected in its GAE performance. The figures are in the public domain. It is perfectly possible that that council thinks that it is getting closer to GAE without actually doing so, given the confusion that exists. I could examine that issue and drop you a note, if you like. I can give you the figures over six years, if you wish.

That would be helpful.

Are there any more questions?

I do not want 10 people asking me for the figures for the councils in their areas.

No. Thank you for your contribution. Like Gil Paterson and Bristow Muldoon, I always find it a pleasure to read your documents, because I can understand them. Gil and I seem to be in the same boat as far as understanding the papers is concerned. I am sure that you will be here again, but this has been a useful session. Thank you for coming along.

Thank you and good luck.

We will have a comfort break of 10 minutes.

Meeting adjourned.

On resuming—