RATE SUPPORT GRANT

HC Deb 22 March 1978 vol 946 cc1705-18

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Harper.]

12.40 a.m.

Mr. Arthur Jones (Daventry)

I welcome the opportunity which this Adjournment debate provides to talk about the needs element of the rate support grant. I recognise that it is at rather an unsocial hour, but I have tried in the past to have it at a more reasonable time. I was successful in the Private Members' Ballot, but on Friday 13th January we had very little time available to us after the previous debates—only six minutes, in fact—and there was insufficient time for me to develop the important questions or for the Minister to reply to the points that I made.

On that occasion the Under-Secretary of State for the Environment—the hon. Member for Greenwich (Mr. Barnett)—was here to reply to the debate. I am pleased to see this evening the hon. Member for Manchester, Gorton (Mr. Marks), who is one of the three Under-Secretaries of State for the Environment. I have looked at the duties which go with the various appointments in the Department and I find that it is the Secretary of State who has the overall responsibility for the work of the Department and is primarily concerned with strategic issues of policy and priorities, including public expenditure, which determine the operation of the Department as a whole. Clearly, the responsibility for the rate support grant lies with the Secretary of State.

In the few minutes that was available on the last occasion, it was the hon. Member for Greenwich who spoke. as I have indicated, and I am not surprised, having looked at what he said, that he has been put into a state of purdah for the time being in regard to the rate support grant.

He said: I accept that the regression analysis system, whereby we assess the needs element that should be paid to each local authority, is complex. A limited number of people fully understand the system". He went on: It is difficult for the ordinary citizen and many people in local government fully to comprehend the system. However, it is an acceptable system—until we find a better one—because it is objective and seen to be objctive."—[Official Report, 13th January 1978; Vol. 941, c. 2119.] I hope to point out that it by no means fulfils that description.

The concern that exists with regard to the arrangements for the rate support grant was reflected on both sides of the House during the debate on the 1977–78 order. I refer particularly to the needs element of the distribution, which was discussed at length and referred to by the Secretary of State as follows: Discussion of needs element distribution is always detailed and technical, and there is much scope for misunderstanding and confusion. … Needs, and therefore variations in expenditure, change year by year… How do we measure these variations in need under the present system? … We then, using a statistical technique, see whether there is any correlation between these factors and the actual expenditure of local authorities. Where there is such correlation, it provides for us a weighting for such a factor. We then use a package of such tested and weighted factors to distribute the grant. The hon. Member for Rotherham (Mr. Crowther), who for many years has taken a leading part in local government affairs, said during the debate, in questioning the whole concept of the rate support grant: Having got ourselves into the realms of comic opera through this incredibly complicated System … it is time to scrap the whole thing and start again…the time has come for a radical reform of local government finance."—[Official Report, 15th December 1977; Vol. 941.] The various factors used in the assessment formula are detailed in Appendix F of the order, and it is interesting to see those which have been tested, included or rejected over the years, details of which are given for the four-year period 1975–6 to 1978–9. The inclusion or otherwise of criteria appears to be of a casual and arbitrary nature. For example, "persons per acre" was not tested for three of the years but was selected for inclusion in 1978–9. "Acres over 1.5 per head" was, on the other hand, selected for the first three years of the period and not tested for the fourth. "Acres per person" was, it appears, treated identically with "persons per acre"—not tested in the first three years, but selected in the fourth.

Another factor, "elderly living alone", was selected for the first three years, and tested but not selected in the fourth, which may be surprising in the context that there must be an increasing proportion of the community in these circumstances.

In the case of "overcrowding", the decision has varied; first year, not tested; second and third year, selected; fourth year, not tested. Similarly with "shared households"; first two years, not tested; third year, selected; fourth year, not tested.

During the debate on 15th December 1977, the hon. Member for Chester-le-Street (Mr. Radice) asked why unemployment had been removed from the needs assessment for 1978–9, to which the Secretary of State replied: We could not find any serious correlation between expenditure needs and the actual incidence of unemployment."—[Official Report, 15th December 1977; Vol. 941, c. 935–84.] Yet the Government spokesman said, on 22nd December 1976: The evidence is that there is a direct relationship between the level of local authority expenditure and the level of unemployment in any given area."—[Official Report, 22nd December 1976; Vol. 923, c. 846.] Appendix F shows that unemployment was not tested in the first two years of the analysis, was selected in the third, and tested but not selected in the fourth. The Minister's remarks surely illustrate the casual nature of the decision-taking on criteria both by the Department and himself.

In Appendix F we read, in paragraph 3: Many of the changes in factors are the result of the inadequacy of the data which made it necessary to drop a number of factors tested in previous years. A few newly devised factors have also been added to the list for testing. The question is bound to be asked "On what basis and by whom are factors introduced and rejected, and how is correlation between the various factors of need reflected in the distribution formula?" My hon. Friend the Member for Henley (Mr. Heseltine), in the rate support grant debate, put it thus to the Secretary of State: He selects the formulae that are fed into the calculation. There is no automatic emergence of needs solutions. It is his decision. The Secretary of State replied: What happens is that there is a technical committee, consisting mainly of representatives of the different local authority associations. They look at particular formulae and recommend the one which they think is the best. Of course, in the end it is my job, as Minister, to decide."—[Official Report, 15th December 1977; Vol. 941, c. 937.] It is surely difficult for the Secretary of State effectively to resist the charge that at the end of the day the decision on distribution is a political one for him, the sheer complexity of the existing arrangements providing a screen for political decisions concealed behind technical incomprehensibility. In maintaining that the choice of criteria is based on the recommendations of the various local authority associations it must be recognised that their interests on behalf of the communities that they represent significantly differ from one another, and I very much question the Secretary of State's assurances in this respect. Consultation, yes; but acting upon agreed decisions, I very much doubt.

It is widely considered that the rate support grant arrangements are determined by civil servants and local authority officers who, working in groups throughout the year, strive to serve, in the main, political objectives, the former on behalf of the Secretary of State and the latter on behalf of the ruling parties in the local authority associations. This means that there is bound to be a lack of objectivity in the manipulation of the grant to produce politically desirable conclusions, achieved by the selection of the criteria in the needs element. However, we must continue to search for ways and means of effectively using such vast public resources to best advantage, relevant expenditure for 1978–9 totalling £12,531 million, as stated in col. 929 of the Official Report of the debate on 15th December.

The Secretary of State's reference to a four-year damping, to flatten out, as he put it, year-on-year changes, is surely an admission that such an introduction must be a recognition of the inability of the regression method to generate a stable formula for grant distribution—a point made in the July 1977 issue of the review published by the Centre for Environmental Studies.

The needs element formula fails to meet any of the four criteria identified by the study team on expenditure needs assessment in 1976 for the acceptability of the needs assessment methods.

These are, first, that actual expenditure should not be used to derive a formula, unless the service level variations can be removed. Secondly, only factors which are judged to cause need for local authority services should be included in the formula. Thirdly, the method should be objective and impartial and should be capable of justification to local authorities in general. Fourthly, the derivation of the needs formula should be understandable and the formula should be simple.

I understand that no fewer than five sub-groups are reviewing the needs assessment formula under a variety of headings, and I hope their recommendations will be published. I also understand that an extended critique of the Green Paper "Local Government Finance" and of alternative methods of needs assessment will be published next month by Tyrrell Burgess, Tony Travers and John Pratt of the Centre for Institutional Studies, North East London Polytechnic, in their response to the Green Paper. It will be interesting to see what this uncommitted team has to recommend.

A pernicious feature of the present arrangement is the assumption that actual spending patterns are the best general representation of need. This produces an inherent tendency for high expendi- ture to be rewarded by more grant, which can then be used to lever up expenditure still further, with the reverse effect upon the low spenders. This situation has the effect of increasing extremes of expenditure and hence of so-called needs, which in turn will aggravate the already significant variations in grant entitlements, and it is difficult to understand how this arrangement can on any adjudication be accepted as reasonable.

It is interesting to consider the effect of the needs element distribution per head of the population for 1978–79. The extent of the variations are all too obvious. The figures made available to me are based on estimated final allocations and express percentage changes from the national average.

For the non-metropolitan counties, the entitlement of Surrey is 46.4 below; of Northamptonshire, 17.9 below; and of Powys, 85.4 above. For the metropolitan counties, the greatest beneficiaries are Manchester and Liverpool, whose percentage changes above the national average are 76.2 and 62.9 respectively. At the other end of the scale, Dudley is below the national average by 35.8 per cent. and Solihull by 22.2 per cent.

Among the Inner London boroughs, the City of London is the only authority below the national average—by no less than 208.3 per cent. The greatest percentage variations are in Tower Hamlets, 111.9 above; and Islington, 118.2 above. The percentage change from the national average for all 12 inner boroughs is plus 66.2. Without exception, all 20 outer boroughs benefit to an overall figure of 43.3 per cent. above the national average. Newham is 99.3 above and Haringey and Brent both 95.6 above. Those with the lowest variations are Hillingdon at 14.7 and Harrow at 17.6.

The percentage share of the needs grant distribution for non-metropolitan counties in England has gone down from 52.37 in 1974–75 to 46.12 in 1978–79, a reduction of 11.82 per cent. in four years. For the metropolitan districts, the comparative figures are 25.32 and 26.5—an increase of 4.66 per cent.—and for London, 16.45 and 21.63, a significant change of plus 31.49 per cent.

An inquiry by the Centre for Environmental Studies, the results of which are carried in a recent CES review, estab- lishes the fact that ratepayers in Labour-controlled areas have to pay higher bills than those in Tory ones, despite the fact that the needs grant is based on actual spending, which should automatically compensate for the higher needs and should not cause increased rate pound-ages. The purpose behind the needs element is to compensate for particular local circumstances, such as bad housing, poor social conditions and low income groups and the report questions the fulfilment of the objectives of the needs element.

An added factor is referred to by the authors Richard Jackman and Mary Sellars: There is, for example, independent evidence that Labour councils tend to spend more, other things being equal, than non-Labour councils. If local authorities in receipt of additional grant spend it, rather than reducing their rate poundages, they will attract a further increase in grant, and so on. The fact that grants and expenditure are highly correlated does not necessarily mean that higher grants are a cause of higher expenditure, but the evidence we have considered suggests that this has been the case, to some extent, over the last few years. However, these comments emphasise a point to which I made reference during the rate support grant debate: It is recognised that the rate support grant relates to past council expenditures and it is clear that it is here that the substantive criticism of the system lies. The prudent and careful are penalised and the profligate are provided with perhaps unmerited additional resources. That is something that the right hon. Gentleman recognises. He says that it is difficult to get away from it."—[Official Report, 15th December, 1977; Vol. 941, c. 1056.] During the December debate the Secretary of State observed—column 935—that nearly half of the needs element goes to authorities in proportion to their population and it is maintained by the Association of County Councils that the main determinant of expenditure need is population in appropriate client groups and changes in population are the main determinant of changes in need. The Secretary of State dealt with this point—column 936—but made no reference to the fact that distribution is based upon the 1971 Census figures, and it is clearly a matter of regret that the present Government decided to cancel the interim Census in 1976, which must, by the use of out-dated figures, lead to significant distortions in any calculation.

The control of local government finance could well be a covert attempt at subverting legislation, and there is evidence of attempts by the Government to erode local authority responsibility. The latest is a Press notice issued on Monday last by the Department of Education and Science arising from the report of the working group on the management of higher education, which was chaired by the Minister of State. A national body to advise on maintained higher education is proposed which will be required to decide on the allocation of national funds between local authorities and institutions.…The body should be seen to exercise considerable authority. A large measure of responsibility and initiative should however be preserved at local level and there will be important limits to the national body's powers. There is now widespread recognition of a desperate need for the reform of local government finance and considerable political will is necessary in both central and local government if changes are to be made. Certainly an excluse is available until after the next General Election, in view of the commitment by the Conservative Party to phase out domestic rating. It has been suggested that it may now be more appropriate to place the expenditure for education, the police and fire services on the Exchequer rather than under the existing shared arrangements. If we are to maintain an effective system of local government, there must be clear accountability by elected members to their communities, and surely this requires that there shall be a direct correlation between the demands upon local electors, whether by a rating or some other form of taxation, and expenditure on local identifiable services.

12.58 a.m.

The Under-Secretary of State for the Environment (Mr. Kenneth Marks)

I am grateful to the hon. Member for Daventry (Mr. Jones) for giving the House an opportunity for a detailed debate on the basis of rate support grant distribution. I apologise for the fact my ministerial colleague, the hon. Member for Greenwich (Mr. Barnett) is not here to reply for the Department. We believe in fair shares, and since my hon. Friend will be replying to two debates tomorrow, I have taken on this task tonight.

In almost every rate support grant debate since 1967 I have tried to make the lives of Ministers difficult, and I must say I have in the past received some strange answers.

I was interested in the hon. Gentleman's closing remarks, and I had in mind the Conservative promise to phase out domestic rating. We have been waiting for four years to hear what the right hon. Lady the Leader of the Opposition would put in its place, but we still do not know the answer.

Too often debates on the rate support grant are bogged down in details of the effects of settlements on individual authorities, and I agree with the hon. Gentleman that it is important to examine the underlying issues. Huge sums are involved. A total of £6.5 billion is paid out in one operation to over 400 different authorities of widely differing circumstances. We must obviously get the arrangements for this distribution as nearly right as possible. The Government are not complacent about their efforts to do so. At the outset, I want to make it clear that I shall talk only about the needs element and do not propose to go over the same ground as was covered before Christmas in the debate on the order.

I begin by dealing with the criticisms of regression analysis and I shall then deal with the alternative systems, one of which the hon. Member has suggested. First, let us establish what we are talking about. Regression analysis has been used as the method for assessing local authority expenditure needs since 1974. It was developed for use in the rate support grant by the last Conservative Administration. Very briefly, the system takes the existing patterns of expenditure by local authorities as the best available basis for assessing how much they need to spend on the reasonable basis that local authorities spend only what they have to. It then uses regression analysis to give the best explanation of this pattern of differences between authorities in expenditure per head, in terms of a range of indicators of need.

A computer ranks these indicators in terms of their significance and gives weightings to those indicators which when applied to the data, for example, numbers of schoolchildren for each authority, gives the best overall fit with the per head expenditure of all local authorities. The range of indicators tested—I accept that various indicators are used on different occasions—represents a range of demographic, social and economic needs. They included, for 1978–79, persons over 65 and 75; persons of pensionable age living alone; persons living in households lacking the basic amenities; ratio of population to housing stock, density and sparsity; road mileage, which affects rural areas in the main; housing starts; school pupils and students aged 16 to 18; children under five; labour costs; unemployment; and low income. All of these are factors which, with the four-year damping system, are used in the assessment.

The hon. Gentleman argues that much of the data on which the rate support grant is distributed is now unreliable. I accept that this is a key problem. We have hitherto relied on 1971 Census data for many of the social factors. These are now becoming increasingly out of date. A few were used for the 1978–79 distribution. Technical analysis has demonstrated that their relative incidence in authorities is not likely to have altered significantly since 1971. But even these are becoming more unreliable as years move on.

The Consultative Council on Local Government Finance has asked central and local government officials to look at the prospects of improvements. Their report will be discussed after Easter. Whilst we attach a great deal of importance to this problem, we must await consideration of this report before going any further. Meanwhile, however, I emphasise that lack of good data is a genuine difficulty and will remain such, whatever method of assessment is used.

The hon. Member argued, I believe, that the increased population of certain local authorities has not been taken account of in recent settlements. Since he comes from an area in which there is population growth I know that he is concerned that this may happen. Increased population is taken into account in the per head part of the needs element. The larger an authority, the more the per head part of the needs element it receives in total. It is true that no factors directly related to population growth were tested in the 1978–79 needs assessment. These were dropped on the recommendation of grants working group, a technical group of central and local authority experts.

I accept that, by and large, counties with growing populations have not fared well in recent settlements. There have been large percentage increases in rate poundage. Daventry will have an increase in April of 13.07 per cent., from 54.77p to 61.93p. Part of my constituency is in the city of Manchester. In the Manchester inner city area the rate poundage this year will I go up by 7.08 per cent., to 96.80p, which is as big an increase as that for Daventry, although the proportion is smaller. I do not think that Manchester is being extravagant or spending more than it needs to spend. I can find quite a few things in my constituency in respect of which it needs to spend more, and I keep telling the authority so.

It is vital to remember that the needs element is a per head grant. If growing counties' per head needs are not growing faster than other authorities, it is perfectly reasonable for them not to benefit in needs element terms. And one would not necessarily expect per head needs in growing counties to increase. For instance, the more efficient use of existing services and the lower proportion of families with social problems will tend to offset higher infrastructure costs faced by authorities. Increasing numbers of schoolchildren will be picked up in the regression analysis. So will the increased number of elderly persons, if they are there. A school pupil in Northampton, or any other shire, counts just as much as a school pupil in Manchester or Liverpool.

We accept, however, that in authorities with active new towns, there will be special problems as a result of population growth. This is precisely why in 1976–77 the Government introduced the undue burdens scheme. The scheme empowers certain new town corporations to make interest free loans to their host counties. Northamptonshire is one of the counties to benefit.

I agree with the hon. Gentleman's point that regression analysis is based on expenditure but I do not agree with the implications that he draws from this. First, it is hard to dispute that expenditure is the best starting point for determining relative expenditure needs in local government as a whole. It represents the views of local government on spending needs and of the Government on aggregate local government expenditure, and it is quite right that regression analysis rewards high spending authorities if their higher spending is really needed. I admit that some of the spending is for the benefit not only of an authority's own population. For example, spending on the arts and museums benefits populations in other areas.

Secondly, only if a large number of authorities with very similar need characteristics and high rates of overspending in a year could the regression result be significantly affected. It is most unlikely that such groups of authorities would all be overspending at the same time. There is certainly no evidence that this has ever occurred. Much has been made in the past and tonight of the seeming implausibility of the factor weightings in the rate support grant distribution formula.

I agree with the hon. Gentleman's facts on factor weightings but not with implications he draws from these facts. I emphasise that regression analysis aims to select those factors which are the most significant explanations of differences in local authority expenditure need and weights them accordingly. The basic purpose of needs element is to compensate for these differences. Needs element is not a proportional grant, and neither are the factors in the rate support grant distribution formula proportionately related to expenditure.

I accept that in recent years there have been occasional large year-on-year changes in individual authorities needs assessments. This is mainly due to changes in the mix of factors in the formula. It is one of the reasons why we used the damping mechanism, whereby the 1978–79 needs assessment was combined with those for the previous three years. The fact is that four-year damping did even out needs element changes and I emphasise that regression is not solely responsible for the changing pattern of grant distribution in 1978–79. There were other factors, for instance, changes in the basis of calculation of labour cost and education data and changes in the relative position of London.

I make two points about the year-on-year changes in the factors used to distribute rate support grant. First, there are obviously year-on-year changes in the pattern of expenditure need. These changes are the reason for annual needs assessments, and one would expect changes in the factors which best explain a slightly different pattern of expenditure needs.

It is obvious enough that an authority in a declining industrial area will have more poor housing, problem families, elderly people needing support to cater for than a more prosperous area and the simple system developed by the ACC would itself try to recognise this. The ACC method assesses authorities' needs partly on the basis of client group num- bers—for example, school children—and partly on the basis of judgments. As presently developed, it suffers from one major difficulty—the heavy reliance on judgments.

The range of possibilities for assessing local authority expenditure needs will be discussed by the consultative council on 21st April. We have had the most extensive review of the options available on needs assessment ever conducted. I am most grateful to the hon. Gentleman for raising this important subject tonight, but I hope that he will agree that the next step is to hear the views of the local authority associations on needs assessment, after Easter.

Question put and agreed to.

Adjourned accordingly at ten minutes past One o'clock.