A Paper Commissioned by UNISON Scotland
Professor Arthur Midwinter

*Introduction

*The Financial Framework

*The Policy Context
Table 1: Local Finance 1990-1995

*Trends in Expenditure
Table 2: Trends in Current Expenditure Provision
Table 3: Trends in Local Spending

*Trends in Taxation
Table 4: Trends in AEF since Reorganisation
Table 5: Trends in Local Taxation since Reorganisation
Table 6: Trends in Council Tax since Reorganisation

*Manpower Trends
Table 7: Service Staff Reductions since December '95

*Conclusions

*References

Introduction

Local government finance has been a continuing problem for British governments in the post-war period McConnell 1998). Councils high share of public spending, combined with the importance of local services in the welfare state and the political sensitivity of local taxation, result in consistent concern over the issue irrespective of the party in government

In this paper, I examine developments in local government finance since the reorganisation of 1996-97. This subject is often regarded as undesirably complex, but the key principles underpinning the system are easily understood, if the mechanisms in practice are more difficult My approach, therefore is to describe the key elements of the system, map the key trends, and evaluate their consequences. I have assumed minimal knowledge of local government finance in aiming at a wider audience than finance specialists

I have relied extensively on information sources available in the public domain, which in the main are publications of central government, the Convention of Scottish Local Authorities (Cosla) the Chartered Institute of Public Finance and Accounting (CIPFA) and the Accounts Commission for Scotland

The paper falls into five key sections - the financial framework; the policy context; expenditure trends; fiscal trends; and manpower trends. In the conclusion, I then consider the effect of these trends on local services, and assess the prospects for the next few years.

The Financial Framework

Local authorities in the main carry out two types of expenditure, current and capital. Current expenditure is concerned with the direct running costs of service delivery, such as staffing costs, energy costs, or interest payments. The key feature of current expenditure is immediate consumption and public benefit Capital expenditure refers mainly to the creation of a physical asset, such as a school, or road network, or major item of equipment, where the benefit flows over a number of years, and this justifies payment by borrowing, on the same principle adopted by individuals for house purchase. In the main, we shall be concerned with current expenditure. Totals of capital expenditure are folly controlled by the Secretary of State for Scotland, through the annual allocation of capital consents - je authority to incur expenditure The pattern of expenditure has been changing in recent years through the development of the Private Finance Initiative (PH) but the capacity of central government to control capital expenditure is undiminished.

Current expenditure has been more problematic for governments to control. All public expenditure in Britain is planned and controlled within the Public Expenditure Survey. In Scotland, local government expenditure is planned and controlled within the Scottish Block. Current expenditure by local authorities in composed of expenditure on services, which is known as Grant Aided Expenditure (GAB), and expenditures on loans and leasing changes. The combined total is known as Government Support Expenditure (GSE). Each authority receives a GAE assessment devised by the client group method, which seeks to assess the cost for that authority of providing a standard level of service. In addition, although this is now under review - each authority receives capping limit, which in effect controls the amount an authority can spend, and is based on its GAR assessment and its existing budget. The present government is pledged to end this system of "universal capping" and return to a more selective approach.

The financing of local spending is composed of grant and council tax income. In addition, authorities can incur expenditure funded by user changes, which is not part of the control system. Central government provides for the bulk of local funding through a combination of specific grants, income levied from non-domestic rates, and revenue support grant (collectively known as central government support to local authorities Heald 1994)). This accounts for round 85% of local funding, and is known as Aggregate Exchequer Finance (AEF). The remainder is funded by income from council tax, in essence a property tax system composed of eight bands reflecting a range of property values. The property element in most cases is more important than the personal element, which only applies to the 17 per cent of the population living in single-person households (Midwinter and Monaghan 1995). All other households are treated as two adult households for tax purposes.

The result is a financial system characterised by interdependence. Authorities are heavily dependent on central decisions on spending and funding, and whilst central government's capacity to control spending has been extensive since 1993, this can result in unwanted or unexpected tax increases and/or service reductions. This high degree of fiscal dependency is known as the "gearing effect", whereby the ratio of grants to taxes is so great that small changes in the former can result in major changes in the latter. (Midwinter and McGarvey 1997a).

The Policy Context

The financial framework creates structural constraints for local authorities. Equally important, however, are the constraints imposed through Government economic policy. In the 1990s both governing parties have stressed the need for sound finance and spending control. The Conservatives consistently sought expenditure restraint from 1979 to 1997, although the precise fiscal objectives changed from delivering real reductions in expenditure to reducing public expenditure as a proportion of national income (Scottish Office 1996). The new Labour Scottish Secretary has similarly expressed a concern with spending restraint. In his statement to the Scottish Grand Committee in December 1997, Mr Dewar stressed the Government's policy of maintaining fight expenditure control.

"The Government is committed to the sound management of public finances and to the avoidance of the boom and bust cycle that has in the past been so damaging to the Country 's economic interest. All Government departments, including the Scottish Office, have been asked to allocate public expenditure for the corning year within existing spending plans. There have, however, been some key additional resources provided in the budget and thereafter to which I shall refer later. The Government's general fiscal discipline must also apply in Scotland. Our long-term economic prosperity is inextricably linked with the performance of the UK economy and it is both misguided and unrealistic to suggest that the solution to Scotland's problems lies in an ever rising curve of public spending".

This general policy of financial restraint is compounded by the lower priority given to local government services in comparison with health under the Conservatives, although this may alter with education now being regarded as a priority. Central government support to local authorities fell from 43% of the Scottish Block in 1991-2, to 39% in 1997-8, the last budget set by the Conservatives. if Labour stick to the inherited plans, it will fall further to 38% by 1999-00. Likewise, capital expenditure will fall from 7.3% in 1991-2 to 3.8% by 1999-00 on current plans. The present Government is however conducting a Comprehensive Spending Review which may alter these priorities.

The third policy constraint facing local government is the handling of public sector pay. Since 1993, the Government has made no provision for pay settlements in its expenditure plans, assuming that any increases will be funded by productivity gains. The problem with such an assumption is that governments do not systematically take account of the impact of such changes. That is, in labour intensive services, reductions in staffing levels can be construed as either efficiency gains or service reductions, and since 1995-6, the freezing of staff vacancies has become commonplace. (Midwinter and McGarvey 1997).

Before examining developments from 1996-7, it would be useful to summarise trends since 1990. In that year, Mrs Thatcher fell from power in the aftermath of the community charge (Gibson 1990). Thereafter, the Conservatives heavily increased central support both to local government and to individual taxpayers. From then until 1995-6, higher and more stable grant settlements were the norm. as the political objective was to defuse the local taxation issue. Tax increases became tolerable, and indeed fell m 1995-6, as councils utilised balances to restrain tax levels. From 1991-2 to 1993-4, grant stability was maintained at around 88% of AEF. For the next two years grant support fell around 1% per annum.

After the 1992 General Election, the Conservatives embarked on a further structural reform of local government, with the objective of streamlining the system into a unitary one, and promoting efficiency and accountability. Economic constraints, however, led to renewed pressure on the public finances, and the policy assumptions underpinning reform (modest savings with minimal job loss) were undermined, as the Government planned to reduce expenditure and grant, whilst arguing that this could be met by efficiency gains, and did not require service reductions and/or council tax increases. This in practice provided a deteriorating fiscal context in contrast with the previous five years.

Table 1: Local Finance 1990-1995
Local Expenditure Central Grant
	£	£
1990-1	4,899m	3,958m
1991-2	5,447m	4,841m
1992-3	5,800m	5,137m
1993-4	5,823m	5,165m
1994-5	6,014m	5,272m
1995-6	6,117m	5,306m
Source: Cosla 1997

Trends in Expenditure

Government plans and controls local expenditure in cash terms, and whilst these permit comparison of trends over the years in terms of sums of money available, they do not take account of the movement of prices over the period, or what economists call changes in "real terms" (ie the value of what authorities can purchase varies with price levels). Our approach, therefore, is to illustrate the changes in cash terms using 1995-6 as a base year (the last year of the old system) then converting 1995-6 figures to the current price base to map the change in real terms over the period (refereed to as constant prices). I also highlight the differences in provision for relevant expenditure and current expenditure, as the latter refer to the sums available for spending on service provision.

The first point to note is that over the three year period the cash provision has risen modestly, by 1.7% for relevant expenditure and 3.3% for current expenditure. However, this growth is due entirely to decisions taken in the current year by the new government. The trend in the first two years is basically a cash standstill. A further problem is that the additional provision in the current year is earmarked by the government as "new spending", particularly to provide additional teachers in schools. In practice, there can be no guarantee that these resources will create new teaching posts, as the grants to consider are paid as block grants which councils can allocate as they wish.

Table 2: Trends in Current Expenditure Provision
	Millions
	Cash Terms	Constant Terms
1995-6	5318.2	5784.8
1998-9	5495.1	5495.1
%Change	+1.7%	-5.0%
Source: Cosla Financial Information Services

Over this period, inflation has been of the order of 2.5% to 3% per annum. I have therefore recalculated the figures through the Treasury's GDP deflation, and this shows that in real terms, the provision for current expenditure has fallen by 5.0%. The fall in current expenditure is of interest to our later consideration of the consequences of these changes They denote, however, the Government's assumptions over spending levels.

In addition, I have mapped out below the actual outcomes in terms of local budgets, which vary marginally from the Government's plans, as councils make differing assumptions about pay settlements, running costs etc.

Table 3: Trends in Local Spending
	Millions
	Cash Terms	Constant Terms
1995-6	5428	5738
1997-8	5557	5557
% Change	+2.4	-3.1

These figures confirm the trend highlighted earlier, with modest cash growth but reductions in real terms of 3% in local budgets for the first two years. In the current year, the Government has increased the capping limit to 5,753 millions, but as noted earlier the bulk of this increase was earmarked for additional spending on education. This was a very tight settlement, and the cash sums available to support existing services constitute a real reduction of 84 millions, and with HM Treasury's inflation forecast of 2.75%, in real terms the shortfall is 142 millions, or 2.6% (Carmichael and Midwinter 1998). Overall, these real reductions are greater than anything achieved by the Thatcher Governments (Midwinter and Monaghan 1993), although councils have not received as much as Government plans assumed.

Trends in Taxation

In the first half of the decade, Government support for local services was increased to stabilise local tax bills. Since reorganisation, the removal of transitional arrangements and the tightening of public expenditure policy has altered this environment Aggregate Exchequer Finance (AEF) is the total of Government determined support for local authority current expenditure, composed of revenue support grant, specific grants and non-domestic rate income (popularly known as the business rate), and this is distributed between authorities on the basis of their GAE assessment. Government strategy has been to reduce its share of local funding sine 1994-5. It reached a peak of 88.9% in 1991-2, after the problems with poll tax, and began falling in 1994-5. As we show in Table 3 below, AEF has actually fallen in cash terms since reorganisation, and the grant percentage (of Relevant Expenditure) has fallen by 2%.With a high gearing effect (ratio of 7:1) this of itself would push council tax up by 14% over the four years.

Table 4: Trends in AEF since Reorganisation
Year	Total Grant	Grant Percentage
1995-6	5306.0	86.7
1996-7	5368.8	87.0
1997-8	5238.7	85.8
1998-9	5271.3	84.7
% Change since 95-6 in cash terms	-0.56%
% Change since 95-6 in constant terms	-5.4%
Source: Cosla Financial Information 1998-9

This substantial erosion of grant support made council tax increases inevitable, and the increase for Scotland in cash terms was 32%. The average Band D Tax is displayed in Table 4 below. But, whereas the Government had permitted some relaxation of spending and did likewise over its plans for AEF, this meant in effect a cash standstill over AEF provision in 1997-8 (+0.6%). Considered with the growth in capping limits of 3.4%, councils were in effect permitted to spend more in the current year through funding from local taxation.

Table 5: Trends in Local Taxation since Reorganisation
	Band D Council Tax
1995-6	624
1996-7	708
1997-8	783
1998-9	827
% change in cash terms	+32%
% change in constant terms	+22%
Source: Cosla Financial Information

The new Government's approach assumed a council tax rise of 7%, but in practice it was less at 5.6%, approximately twice the level of inflation. whilst it did not seek to change the level of tax increase, it did take action to shift the burden between areas. Donald Dewar reported this action to Parliament thus:

 

"... a number of significant technical changes are working their way trough the grant distribution arrangements, and I think that it is clear tat it is acceptable tat fluctuations in the way we distribute grant should cause big creases or decreases in council tax levels wholly unrelated to the spending decisions of the councils themselves. I have had careful discussions with Cosla about a grant safety net to reduce these fluctuations.... Therefore, in this year's grant distribution I will ensure that major changes in GAE assessments are phased in gradually, and tat there will be a council tax safety net in the system which will restrict the effect of grant distribution changes on council tax levels."

(Scottish Office Press Release, 2 December 1997)

Fluctuations in the post reorganisation period have been considerable because of problems which arose over disaggregating the budgets of the former regional authorities, and the assumptions made by Government over te scope for efficiency gains from reorganisation. The trends for individual authorities are mapped out below. Authorities with the highest increases tended to be those who lost resources from the impact of reorganisation. Those who suffered most from the mismatch problem all incurred above average increases in council tax, including Argyll and Bute, Dundee, Glasgow, Midlothian and West Dunbartonshire.

Table 6: Trends in Council Tax since Reorganisation
	1995-6	1998-9	% Change
Aberdeen	599	794	+33
Aberdeenshire	495	695	+40
Angus	593	709	+20
Argyll & Bute	642	881	+37
Clackmannanshire	630	831	+32
Dumfries & Galloway	525	731	+39
Dundee	708	990	+40
East Ayrshire	614	819	+33
East Dunbartonshire	642	790	+23
East Lothian	620	760	+22
East Renfrewshire	571	729	+28
Edinburgh	735	867	+18
Falkirk	548	699	+28
Fife	640	771	+20
Glasgow	676	1074	+59
Highland	546	776	+42
Inverclyde	618	863	+40
Midlothian	640	892	+39
Moray	508	699	+38
North Ayrshire	616	751	+16
North Lanarkshire	652	812	+24
Orkney	467	595	+27
Perth & Kinross	587	732	+25
Renfrewshire	640	783	+22
Scottish Borders	509	639	+26
Shetland	428	558	+30
South Ayrshire	671	792	+18
South Lanarkshire	643	859	+34
Stirling	577	782	+36
West Dunbarton	636	1011	+59
West Lothian	581	829	+43
Western Isles	524	656	+19
Scotland	624	827	+32

Glasgow also did badly out of the assumptions made by the Government over the scope for efficiency savings from reorganisation. However, even the lowest tax increase (+16%) is around twice the inflation level for the post reorganisation period.

Manpower Trends

Manpower figures for local authorities are monitored and published every three months by the Joint Staffing Watch of the Scottish Office and the Convention of Scottish Local authorities. However, mapping longer term trends is complicated by the discontinuity of the series and by the fact that by 1995, authorities staffing levels were already experiencing reorganisation effects. The trend in the period 1988-92, however, is clear enough, and is one of gradual, modest increase in line with a similar growth in spending. (Joint Staffing Watch 1997). Thereafter, coinciding with the return of retrenchment and pay policy, the downward trend returns. Figures are also complicated because of the transfers of responsibilities which took place. The impact of the pay policy was an important factor -

 

"the Government has confirmed that for the fifth year in a row
the effects of any pay settlement will require to be absorbed within councils budgets. This has had a cumulative effect on the level of service cuts which councils have required to make amounting to around 350 millions in the four year period of the pay policy to date."

(Cosla 1998)

In the pre-reorganisation period the expectation was that minimal job loss of 300-1,800 staff would result from the structural reforms, with the majority of staff simply transferring to the new authorities -

 

"The vast majority of those employed in local government will be transferred. Plainly a school which comprises a number of teachers of say French or Science on 31 March 1996 will need the same teachers on the following day, ie the teachers will transfer. As I have said, the vast majority of staff will transfer, so we are talking about a relatively small number of people who will not transfer."

(Hansard, 13.7.94, p 1894)

The assumption, was, therefore that most of the job loss would be in administrative and clerical posts, not front-line service delivery. However, the Staff Commission became increasingly concerned that actual numbers would be much greater because of the deteriorating financial context The Joint Staffing Watch reported a loss of 11,100 PIE posts in the two ye&s from June 1995, and of this reduction 7,800 occurred immediately on reorganisation, with a further 3,300 from December 1996 to June 1997. A further 600 staff have gone in the three months to September 1997, making a total loss of nearly 12,000 staff, or 5%.

Nor have the job losses been confined to administrative or secretarial posts, with major job losses in Central Support Services, education, social work and roads and transport.

Table 7: Service Staff Reductions since December '95
	Numbers	Percentage
Corporate Services	+143	+3.6
Central Support Services	-2483	-15.9
Planning	+277	+8.7
Teachers	4331	-7.7
Non-Teaching Staff	-803	-3.6
Social Work	-952	-2.4
Housing	-32	-0.4
Roads and Transport	-1406	-21.6
Arts, Sport and Leisure	-281	-6.1
Libraries, Museums and Galleries	-137	-3.4
Trading Standards	-119	-14.8
DLO/DSO	467	-0.8
Other	+244	+29.0
Police	-219	-1.1
Fire	+44	-0.8
Source: Joint Staffing Watch 1998.

These changes may wen be presented politically as 'efficiency gains', but they in fact constitute reductions in service delivery. Ministers have been advocating reductions in class sizes, but this will require extensive reinvestment in schools to allow this. Comprehensive data does not exist to quantify the complete impact on service levels. Some examples are available however.

Despite the emphasis on care in the community, and increased longevity, in
1996-7 some 81,559 people received a home care service, compared with 91,738 two years earlier, a reduction of 10,179, or 11%. (Accounts Commission 1996, 1998). Teacher staffing levels fell from 67.3 per 1000 pupils in 1995-6 to 62.0 per 1000 pupils in 1997-8. Spending on transport subsidies fell from 15 per capita to 9 per capita in the same period. Th short, council taxpayers were paying more for less services in return.

Conclusions

The post-reorganisation period has been one of cutback management. Spending, manpower and service levels have been reduced, and council tax bills have risen substantially. At the moment, the Conservative expenditure plans require a cash standstill in government funding for 1999-2000, which will maintain the current cycle of decline. Even the relaxing of capping in the current limits did less to ease pressure on councils, as this assumed 2.1% would be reflected in additional prioritised resources for education, and only 1.2% to support existing services, when inflation was forecast at 2.75%. Cosla calculates the sum available in the current year for growth as a mere 0.7% (Cosla 1998). if the present plans are maintained, then more of the same will follow.

The political strategy of the Government for local government is two-fold - maintain "sound finance" and invest in education". Sound finance is interpreted as requiring firm control of spending levels, and only borrowing to invest. In local government, this approach has been the norm for many years. Councils are legally required to balance budgets, and borrowing is mainly used to finance capital programmes.

Sound finance, however, also requires governments to provide adequate resources for the programmes under their control. The present pay policy has resulted in persistent underfunding by this criteria. what governments have done is to disregard the impact on service levels on the pretext that pay increases can be accommodated without service consequences through efficiency gains. This is the politics of wishful thinking. The continuation of the present approach will simply reinforce present trends.

Because of the reorganisation effect, it is difficult to predict precisely the consequences of continuing underfunding. If we examine those aspects of local government which the reforms assumed had scope for efficiency gains, then we can attempt to isolate such effects. We cannot do so with precision, as the "mismatch" effect of reorganisation clearly was a cause of job loss in cities like Dundee and Glasgow. The combined job loss in corporate, central support, and housing management since reorganisation is around 2000, slightly above the maximum forecast made by the government in its modelling exercises. This leaves around 10,000 posts which have gone mainly because of financial constraints. Funding fell by 5.4% or 315 millions in two years and budgets by 3.1% or 181 millions. If the government sticks to the Conservative plans next year, and inflation for that year is around 2.75%, then the shortfall will be around 150 millions for that year, the biggest squeeze yet on local funding. If additional resources are provided on an earmarked basis for education, then the burden of cutbacks will fall on other services. In broad terms, we have seen that a 1% reduction in funding results in 2000 job losses, (excluding the reorganisation effect). If the Comprehensive Spending Review does not eliminate the underfunding resulting from the pay policy, then this pattern of job loss and service reduction will continue.

The Government therefore has a clear choice. It can continue cutting spending and services in the mode of its predecessor, or restore financial stability to grants and local taxation. That political choice should be made clear to the people of Scotland, and not concealed in the rhetoric of sound finance and efficiency gains which is misleading and inaccurate.

29.5.98 Professor Arthur Midwinter

References

McConnell, A (1997) "The Recurring Crisis of Local Taxation in Post-War Britain" Contemporary British History, Vol 11, No 3 Autumn, pp39-62.

Midwinter, A and McGarvey, N (1997a) "The Reformed System of Local Government Finance in Scotland" Policy and Politics, Vol 25, No 2, pp 143-152.

Gibson, J (1990) The Politics and Economics of the Poll Tax (Wolsely: EMAS).

Midwinter, A and McGarvey (1997b) "Local Government Reform in Scotland:
Managing the Transition" Local Government Studies Vol 23 No 3, Autumn pp 73-89.

Carmichael, P and Midwinter, A (1997) "Downsizing City Government in Scotland", paper prepared for the Urban Affairs Conference, Houston, USA.

Heald, D A (1994) "Territorial Public Expenditure in the United Kingdom", Public Administration, Vol 2, Summer, pp 147-175.

Scottish Office (1996) Serving Scotland's Needs (Edinburgh HMSO).

Midwinter and Monaghan, C (1993) From Rates to the Poll Tax : Local Government Finance in the Thatcher Years, (Edinburgh : EUP).

COSLA (1998) Financial Information 1997-98.

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