Wednesday, 15 December 2010

Cuts, Inflation And Interest Rates - Part 1

Disraeli said there are lies, damn lies and statistics. Governments are good at using all three for their purposes, as Wikileaks have demonstrated. On Monday, if you believed the Government spokesmen, Councils funding had been reduced by an average of just 4.4%, and some Councils were to face Cuts in their Spending power of less than 1%. How wonderful, compared to the predictions of draconian cuts, of more than 10%, that had been previously discussed. But, hold on, the Government were careful to talk about a spending power reduction. What was this animal? Well it was one of those creatures created by politicians and bureaucrats to divert attention from the truth. It diverted attention from the fact that, in actual fact, the average reduction in the Core Government Grant was around 9.9%, or only just below the figure that had previously been discussed, and for some Councils - surprise, surprise Councils in the least affluent areas where Labour predominates – the actual Cuts are more like 15%. But, Local Government finance is labyrinthine in its complexity and opacity. Its designed to be that way so that Local taxpayers have no chance of understanding exactly where there money goes. Trying to unravel the realities of what the Liberal-Tories Local Government Settlement actually amounts to is still taking the time of economists and accountants. The task is made more complex by the fact that the Liberal-Tories have added in a number of other “transitional” relieves, as well as offers to provide an additional sum of 2.5% to those Councils that freeze Council Tax. In fact, this really amounts to a further subsidy to largely Tory Councils in affluent areas, because it is in these areas where Councils can avoid raising Council Tax, as a means of covering some of the shortfall arising from the reduction in Government Grant.

The means by which the Liberal-Tories have palmed the 9.9% figure, and replaced it with a figure of 4.4%, is to talk not about the actual amount of Revenue Support Grant provided to Councils, but to talk about the total amount of external funding for Councils, which includes all sorts of Grants including those from the NHS to Local Authorities to cover the costs of Social Care. But, this too is a fraud because, although the Liberal-Tories have spoken about ring-fencing NHS spending, they gave no such commitment to Social Care. Even the supposed ring-fencing of NHS spending is a sham, because, in reality NHS costs and commitments will continue to rise, especially given the large costs the Government is unnecessarily imposing on them through the requirement to once again restructure, and to scrap Primary Care Trusts. That is estimated to cost around £3 billion.

In the first weeks of the Liberal-Tory Government, Michael Gove, who until that time had been seen as one of its rising stars and a safe pair of hands, came forward with the proposals to scrap the Building Schools For The Future Programme. It was a complete shambles. Not only did the proposal provoke the ire of all those communities which had been promised new schools, but it also provoked opposition from all those Construction Companies, IT companies etc., who at a time when the economy was beginning to slow down again, had been looking forward to lucrative contracts from Local Authorities. Instead some of those companies at the very least saw their share prices tank, and some went out of business. But, worse than that Gove's Civil Servants provided him with a list of schools that were still to go ahead, which he read out in Parliament. But, the list was wrong. That provoked even more ire from those who once more found that they had been denied. But, worse, when the list was corrected it came out wrong again, not just once, but several times. Not surprisingly, Gove sunk into the shadows for several months. But, the Government's troubles over Schools was not over. It announced that it was scrapping the funding for the School Sports programme, claiming that the scheme was a complete failure. The trouble was that this information provided to Ministers was also wrong. Finding itself once again embarrassed by the facts, and by the vocal opposition of leading figures in Sport and Education, David Cameron, only days after standing up during Prime Minster's Questions to defend the decision in the face of opposition from Ed Miliband, found himself announcing a U-Turn, and basically overriding the Department and his own Minister!

In the last week, this increasing farce of incompetence has moved from education to Health. After months of Health Minister La La Lansley parading his policy of Health Service reforms, it has become increasingly apparent from within the Department of Health, and from sources outside Government that these proposals appear to have all the same hallmarks of having been drawn up on the back of a fag packet as the Education reforms. Faced with the likelihood that the reforms would fall flat on their face leaving the NHS in chaos, it appears that Number 10 were getting increasingly worried. It looks likely that the proposals might be pulled, but the trouble is that already considerable damage has been caused, because not surprisingly large numbers of the best staff from the PCT's, assuming that they might be out of a job in the near future – a near future when another ½ million other Public Sector workers might be joining them – have got out, and found alternative employment. In fact, that's one reason that the proposals were unlikely to succeed as the whole edifice collapsed even before any transition could take place.

Now they are facing further powerful opposition. The Commons Health Select Committee, Chaired by former Tory Health Secretary, Stephen Dorrell, has come out declaring essentially that the Tories Health Service proposals are unachievable, as Left Foot Forward sets out. But, of course, this has implications for Local Government too, because as part of his calculations for Local Government, Eric the Pickle, has assumed that they will receive £0.6 billion from the NHS for Social Care. But, given that the Social Care budget is not ring-fenced, and the NHS as even Tories like Dorrel are pointing out will not be able to meet the Government's spending limits, the first thing they are likely to economise on will be their payments to Local Authorities for Social Care.

Of course, as former Local Government Finance Researcher, Philip Walker, relates at Left Foot Forward, it is not completely unfair to take the total spending power figure for Local Authorities. The Revenue Support Grant is a sizeable component of Councils financing, but it is by no means all of it, as The BBC illustrate here. If Council Tax were frozen, then the Government says it will give Councils a further 2.5%. They are free, not to take this 2.5%, and instead to raise Council Tax, but as Walker points out, in the most deprived areas the tax base is smaller so the potential for raising more money through Council Tax is reduced. Moreover, as I pointed out in a blog a couple of months ago, in those areas, the consequences of a reduction in aggregate demand on the Local economy will be greater than in more affluent areas, because of the multiplier effect. And, although, 2.5% should more than compensate for inflation if it were only at the Government's target level of 2%, it most certainly will not at the current level of CPI at 3.3% and rising, and of RPI at 4.7% and rising.

But, we should use Eric the Pickle's figures back on him. If as he claims Councils' Spending Power is not reduced by more than an average 4.4%, then we should demand that Councils set their budgets accordingly with no more than that reduction. He also says that many Councils have large Bank Balances – in fact some do, I know my old Council received £55 million from the sale of its Housing Stock, which was basically stuck on deposit earning a small amount of interest, and was used for the pet projects of the Treasurer and to cover the costs of paying out large amounts to the Chief Officers in Voluntary Redundancies and Early Retirement. One of my old UNISON comrades told me recently of one Chief Officer at a Council he'd heard of, who had been suspended for having cost the Council £1.5 million by failing to claim grants that were available, and had been retired with a package worth £400,000. Again we should take Pickles at his word and demand a complete opening of the books of Local Government so that we can see just how much money there is, and where its going.

Forward To Part 2

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