Sunday, 6 December, 2020
NEWSLETTERS Q4 2020
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Sunday, 6 December, 2020
A special edition focusing on Local Gov Finance: Cuts, Value, and Values
THE SPENDING REVIEW IS OUT
The spending review is out and the news is mixed for Local Government. This week’s Sunday Edit takes a slightly deeper-than-usual look into a specific topic: local government finance. But first:
- What does the spending review mean?
- What are the choices to create a balanced budget beyond salami slicing and asset fire sales?
- And, is now the time to take a different perspective on value?
In short, the spending review is not great for local government long-term stability. It’s a blend of settlements, ring-fenced allocations, and the ever-frustrating ever-competitive bid pots. Local government-specific allocations are not out until 17 December however, it is possible for councils to make an educated guess on what they’ll receive based on past experience and the specifics of the funds available. We’ve read through the guidance and uncovered the following:
- There will be a fifth tranche of COVID-19 Support money available for next year yet it’s not nearly enough for local authorities to, “do whatever it takes.”
- Councils are allowed to recover 75 per cent of lost council tax and business rates as well as 75 per cent of sales fees and charges from services. This will carry on until June, which we can assume means the Government isn’t planning for COVID-19 measures to be over until at least summer 2021.
- The Council Tax Support Hardship Scheme will run into next year. Council tax increases are capped at 1.99 per cent without a local referendum however an additional 3 percent increase for adult social care is allowed and can be spread over two years. Will some local authorities do this? They would have some resident backing, as a survey conducted by Ipsos MORI on behalf of the Health Foundation last year indicates that there is increasing public support for paying more tax to maintain and improve health and social care.
- Meanwhile, the Revenue Support Grant will rise in line with inflation.
- There are some specialist social care funds and the New Homes Bonus carries on.
- There is no business rate reset and business rates are not going up.
What about capital strategies and assets?
Finance Chiefs across the country will have to submit a plan for capital spending and financing plans covering three years. It’s worth noting that PWLB rates are down, meaning that costs will be back below rates offered by the markets including the patient capital funds. This has caused ripples with council’s who have taken positive steps to set up Municipal Bonds but other rules may see the rising trend in bonds continue.
Croydon Council’s 114 Notice has given the Treasury the excuse to put in place draconian measures to stop public borrowing for pure investment purposes (Remember: it is primarily the lack of grant and a government push for self sufficiency that has led to council’s exploring this kind of out-of-area property speculation). If any part of an authority’s capital programme is deemed to be primarily for investment purposes, the whole portfolio is punished. We believe this calls for a rapid review and update to property strategies and planned schemes.
However, it is clear that the changes do not affect prudent borrowing for regeneration that happens to result in income from property. This regen-first approach seems entirely reasonable and does not stop projects that generate surplus nor stop that surplus being reinvested for further social purpose. Indeed, why should the public sector be asked to take risks in pursuit of public policy outcomes whilst only private parties reap the financial reward having taken no risk? On this matter, I refer back to our previous Sunday Edit reading recommendation: Professor Marianna Mazzucato’s Value of Everything.
SO, TO THE WORK OF CREATING A BALANCED BUDGET
The second and third pandemic waves will be costly. There will likely be a further need to create more short-term hardship funds to get the most vulnerable through this winter. We can assume that the settlement will not save the outliers like Croydon Council. They need radical solutions and it will be hard going for those that live on the “wrong side” of a postcode lottery. However, the settlements will mean that many prudently managed local authorities can go into the budget setting debate with choices and the means to lead the recovery.
Salami slicing is one possible approach to a balanced budget, but does anyone really believe that is a sustainable option?
There is almost always fat to trim. But let’s face it: cutting to the bone is what led to the threadbare cupboards council’s have been drawing on for the COVID-19 response. We’ve been witness to heroic local government leadership who know that the answers lay in a combination of progressive demand management and a growth-led recovery.
I’m sure some will take issue with the language of growth and demand management. However, it’s clear that there is work to be done by focusing on early intervention for the vulnerable, harnessing the power of technology and data, and ensuring growth leads to shared prosperity (not wealth extraction) and reverses the damage we are doing to the planet (and our neighbourhoods).
GOOD GROWTH, INCUSIVE ECONOMIES, AND BUDGET SETTING WITH VALUES IN MIND
Standard questions to set balanced budgets tend to be, “can we…find workforce savings / cut third party costs / sell assets to raise capital?” In our line of work, we are often in the discussion about assets. Whatever the topic, our advice is always to start these discussions with clear strategic outcomes in mind. This way, the standard questions are best able to be met with thoughtful answers. For me, the most strategic of all issues is an economic recovery that works for the hardest hit.
How to capture the value of surplus operational assets?
A clear option is repurposing operational assets that may now be considered surplus as we see dispersed and flexible working as normal and lesser need for traditional office space. A quick sale could lead to suboptimal prices (see: fire sales). A clear vision will help understand how the sales will contribute to the overall inclusive growth agenda.
Do we have time for this?
Yes or if not, you can buy time. Where an asset could help regeneration plans, you have the option to sell it to your own delivery vehicle (simultaneously lending the company sufficient cash and working capital via PWLB). The cash is released but you will be able to retain control. You can put the asset to use for regeneration and simultaneously add value through de-risking measures such as remediation and securing permissions all whilst ensuring your route to market includes progressive procurement or partnering strategies that enforce social value measures. This way, you can legitimately realise future value gains.
Raising capital receipts right now also offers a means of supercharging transformation plans. Councils are allowed to repurpose capital receipts for transformation activity that are forecast to generate ongoing savings to an authority’s net service expenditure. That includes plans that reduce demand for services or generate additional incomes streams, including Delivery Vehicles or Agencies as previously mentioned. However, the rule is due to expire in 2022 and we see a need for a concerted effort for reform now.
And, what about levelling up funds?
Northern Authorities and Combined Authorities are preparing to bid for the £4 billion levelling up fund, plus there is the UK Shared Prosperity Fund intended to replace current EU grants. It seems absurd that levelling up is subject to bidding, but if there is a game to be played, then it’s best that each local authority is geared up to play well. We are working with economic development teams across councils to ensure they are able to attract substantial funding. I suggest the Government’s instance on competitive bidding is even further support for our local authorities partners to keep investing in early stage plans. This should include feasibility and business case work (with the New Green Book) but also investing in the structures and governance that can attract and deploy investment at pace.
HOW TO VALUE, VALUE?
Just a final though on the bigger picture to help lift us out of the detail of balanced budgets and Medium Term Financial Plan. I highly recommend the latest Reith Lecture series with Mark Carney. His talk engages us on what he calls the, “crisis of values.” Market economies have evolved into ‘market societies’ where price determines the value of everything. According to Carney, this is behind the growing inequality in income and opportunity, health and economic crises from a global pandemic, the existential threat of climate change, and threats to employment in a digital economy. Our town and cities are on these fault lines and local government is the front line of leading the response.
So, I leave you with these prompts: let’s use this budgeting exercise to think harder about what we value. Let’s bring the creative minds of our local government departmental directors together and make budgeting a creative process. And, maybe, spare some time to think the unthinkable and reassess the value of that radical proposal for a new ‘Central Park’ to replace a shopping centre? Or, consider how do we pay care workers a fair wage in our revenue constrained (and wage capped) local government? And most fundamental to all these questions, how do we create and share prosperity for all?