Category Archives: Local government

The new localists?

By Paul Hackett, director of the Smith Institute

The Labour Party has often talked up localism in opposition only to disappoint once in power. But current signals suggest an Ed Miliband government would radically change the way in which public money is raised and spent locally

Labour’s support for localism continues to gain momentum and was given a further push last week when Hilary Benn, the shadow secretary of state for communities and local government, called for a new English deal based on greater financial devolution.

At the launch of the new Smith Institute report on ‘Labour and Localism’ Benn said the case for decentralisation was now ‘overwhelming’ and that ‘money, and the power that goes with it, needs to be moved out of Whitehall and down to communities’. This sentiment was echoed in the institute’s report, which includes essays on local government reform by Labour council leaders and MPs.

With Labour dominating most of the big cities and hoping to do well in the forthcoming local elections, there is a growing feeling that the shadow team now get’s localism and sees it as integral to the party’s evolving narrative around reforming the state and rebuilding the economy.

Whilst it is true that Labour has traditionally talked up the English devolution story in opposition, often only to disappoint in government, there seems to be more than just mood music to the latest pronouncements from Ed Miliband about giving power back to local people and local councils.

This is re-enforced by the success of the Greater Manchester Combined Authority and the roll out of the city-regions concept to other Labour cities, such as Leeds, Sheffield, Liverpool and Newcastle. Richard Leese, leader of Manchester City Council, talks in passionate terms about dynamic economic geography based on sub-regions and comments in the Smith report that ‘the last Labour government took ten years to realise that it could not achieve its objectives through centralised, compartmentalised, nationally imposed programmes. We mustn’t make the same mistake again’.

As we move out of the depths of recession, Labour seems prepared to embrace a more asymmetrical system of government, with different powers transferred down to different councils at different times.

There’s still plenty of anger about the cuts in funding and the way fiscal austerity is disproportionately hurting those councils with the greatest need; and there’s plenty of concern across the party about postcode lotteries, the lack of co-terminosity in many places and arguably too many local agencies (like the Local Enterprise Partnerships) competing with each other. But many are now talking openly about a new more joined-up, place-based localist future and letting a thousand local flowers bloom.

The view from the majority of newly elected Labour MPs (many of them former councillors) is that the party’s past centralist tendencies are unpopular, unfair and unsuited to the new economy. There is also a realisation that any incoming Labour government will face a very tough inheritance and that distributing funding on a fairer basis will be difficult and expensive.

The authors in the report nevertheless argue that the current funding system has reached the limit of its capacity and needs more than just tinkering. That might not translate immediately into anything quite as far reaching as the local tax reform proposals in Boris Johnson’s London Finance Commission, but the idea of city local government having much greater financial self-determination and accountability is taking hold in the Labour ranks – even if business is opposed to local rate setting.

According to shadow local government minister Andy Sawford, Labour is embracing the power of localism and will radically change the way in which public money is raised and spent locally. Clive Betts, the Labour chair of the CLG select committee, claims there is no turning back and envisages a future under Labour where councils have much greater income-raising powers and much more freedom to borrow. He says that a proportion of the national tax take should go to local authorities by right, and not at the whim of the Chancellor.

Labour’s policy reviews are wrestling with the pros and cons of reconfiguring the relationship between central and local government and forming a new financial settlement. That won’t be easy, especially when so many Labour areas have a relatively weak capacity to raise taxes and are heavily reliant on central government to meet the (growing) demand for services. There are also limits to how far local taxes and charges can replace local grant, and reduce the common pot for equalisation.

The labyrinthine system of local government finance doesn’t help, but the elephant in the room is economic geography and uneven economic development, which is getting worse as London races ahead as Europe’s leading global city.

Labour wants financial devolution, but not to enable Westminster City Council (which raises almost as much in business rates as all the eight core cities combined) to declare total financial independence!  The Labour leadership will also have to think long and hard about reforming council tax and maybe embarking on an England-wide property revaluation, which is long overdue (the last rebanding was in 1991) but could cause financial pain for large numbers of homeowners and cost votes.

Many Labour council leaders acknowledge what has been achieved so far on a cross-party basis, but want a distinctive Labour localist settlement which goes far beyond the piecemeal approach advocated by the coalition and practised by the previous government. In place of policy triangulation the call from some quarters is for radical constitutional and financial change, with the Local Government Association taking responsibility for distributing government grant (as happens in Denmark) and cities having control over a range of property taxes.

How far will Labour go towards meeting the ambitions of Labour councils is still unclear. What is becoming more certain though is that Ed Miliband is going to have to offer them a lot more than his predecessors if he wants to present his party as the new localists.

This article first appeared on Public Finance

 

Will Labour invest big time in council housing?

By Paul Hunter, head of research at the Smith Institute

Back in 2009 John Healey, the then Housing Minister, consulted on reforming the way council housing was funded under the housing revenue account (HRA). This technical sounding reform was not on the party’s pledge card and never likely to get people marching in the streets. However it has since heralded a rebirth of municipal housing. The extent of this renaissance is at present small but has enormous potential.

Under a future Labour government councils all over the country could be building again at scale.

Until the end of the last Labour government council housing was seen as part of the problem. The Tories decimated the social housing sector with the introduction of Right to Buy (with few funds available to replace lost stock). New Labour’s preferred providers were housing associations who had freedoms to leverage in private finance while the policy focus was on ‘decent homes’ rather than new build.

The HRA reforms have started to reverse this trend, allowing council’s greater autonomy over their housing stock and freedoms to borrow to build. In our new survey (with Housing Voice) of councillors leading on housing, the HRA reforms have gained strong support (only 9% of those surveyed were dissatisfied). Moreover, the appetite for building is impressive with 93% stating that they were planning to build new council housing. Given the chronic undersupply of housing this should be a good news story, especially given that many of the most ambitious building plans have emanated from Labour controlled councils, such as Southwark and Manchester.

However whilst most councillors in the survey viewed building new social housing as the top priority, the numbers of homes local authorities plan to deliver still remains small compared with housing associations. The majority of councillors envisaged building less than 500 homes over the next ten years, and 40% thought that new build would not compensate for loss of stock through Right to Buy, void sales and estate regeneration.

The challenge then for Labour’s shadow team is how best to support councils to supply more homes at sub-market rent. Under the reformed HRA councils can only borrow up to a certain limit (far lower than housing associations, who can borrow billions off the public books through the bond markets). Maybe it is time to level the playing field?

Although much of the talk since the financial crash has been about deleveraging, for council housing the opposite is true. The problem is that a future Labour government will have to keep an eye on the deficit. Allowing councils to borrow more could provide much needed homes (78% of councillors said they would build additional new homes if the debt cap over council housing was to double) but equally by doing so it will push (as things stand) up public sector borrowing. This is, of course, a matter of political will and priorities, but movement on the cap would undoubtedly help increase supply. Moreover, it could potentially help reduce the Housing Benefit bill in the expensive private rented sector, provide new jobs and help dampen market rent increases. The extent of the gains is unknown, not least because a consequence of undersupply is overcrowding. Reducing overcrowding would come at a cost of increased Housing Benefit claimants and higher rents (i.e. moving from a two bed to three bed property). Nevertheless the economic and social gains seem compelling.

Increasing the ability to borrow clearly follows the line of reasoning of greater localism which was behind the reforms. But subsidised council housing will still need subsidy! If councils could borrow more those debts would still need to be serviced and paid down over the medium term. At present, sub-market rent levels fail to cover the build costs, with many social landlords turning to ‘affordable’ rent (up to 80% of market rent) and councils using planning gain (levies on private development) to cross subsidised new housing at social rents. There is a limit to the latter (and the former remains highly controversial) meaning new build housing requires grant funding to cover the shortfall.

Despite the Coalition’s talk of investing in infrastructure, grant for social housing (as opposed to ‘affordable’ housing) has been cut dramatically. Labour has pledged to invest more on housing, but how much more is unclear.

Labour councils are leading the way in delivering new council housing. However, the levels are unlikely ever to match the heyday of municipal housing, not least because of the mistakes that were made with system built tower blocks. However, councils have the potential to do much more if they have additional freedoms over borrowing. To expand still further, and to deliver genuinely affordable homes, will also require further public investment. The evidence shows many (Labour) councillors have a strong appetite to build subsidised council housing, but the extent to which this happens will depend largely on how much of a priority it is for central government.

Click here to read the survey

This article first appeared on LabourList

Where next for council housing?

By Paul Hunter, Head of Research

Last week we published our survey of council housing directors one year on from the radical reform of their housing revenue accounts. The policy started under Labour and enacted by the Coalition devolved budgets to council’s and enables them to borrow and build. Against the backdrop of austerity, it is a rare good news story for local government.

Unsurprisingly, perhaps, most of those surveyed viewed self-financed council housing as a good thing. The evidence from the survey shows that most councils are investing in new or existing homes rather than paying off their debts. However, the changes are not without criticism. Many councils were unhappy with the original debt allocation which (added to the debt cap) left little room for borrowing to build or invest on a large scale. And the debt cap itself came in for criticism – not only does it go against the principle of self-financing but puts them councils a disadvantage to housing associations and private housing providers.

As council’s become more confident about managing housing finance the pressure will mount for a loosening of the borrowing caps. At present council housing is grossly underleveraged. As our previous report on HRA reform in 2011 showed, councils could access billions if the rules changed. However, reducing the overall level of national debt is the overarching aim of the Coalition, and such a reform pushes in the opposite direction.

Regardless of the cap, councils also face two other major challenges. First, even with the new freedoms there are considerable issues with social housing funding. Capital subsidy in real terms has been reduced in the 2013 spending review and has been cut by over half compared to pre-2010 levels. So even if the cap was scrapped councils would face similar predicament as housing associations regarding tenure mix – which indeed councils do when granting planning consent.

Second, many councils properties do not meet the decent homes standard. For some councils, without further grant meeting the decent homes standard will eat up any investment that could go into new build. Moreover, some councils might face the unenviable position of having to sell off and demolish estates to reduce the costs of major repairs – hardly a way to reduce pressures on affordable housing in high demand areas.

If government however sees councils as part of the solution to the housing crisis, then it must surely extend authorities further financial freedoms. Putting councils on a more equal footing with social landlords and allowing them to sweat their assets more need not necessarily have to happen in one big bang. Debt caps could be slowly lifted. Although not popular with uber localists, government could adopt an earned autonomy approach, whereby those authorities which have proved their ability to take prudent decisions and manage their housing stock efficiently could be given more autonomy. Another way might be to allow local authorities to trade their headroom, so those that have opportunities to invest using investment from those in areas of lower demand. All are not without their pros and cons and would be boosted by grant funding. However, such reforms would keep a lid on borrowing and do more to enable those councils eager to build and invest.  Any increase in council housing most be a plus in the current climate.

Where next for LEPs?

Paul Hunter, Head of Research, The Smith Institute

This week saw the launch of a Smith Institute collection of essays, Where Next for LEPs. The report which includes a commentary on a new survey of LEPs, shows there is little appetite for a return of the Regional Development Agencies, despite recognition of their achievements. There now seems to be cross party support for LEPs and city regions. According to Labour’s shadow chief secretary, Rachel Reeves :

“We won’t waste time on a costly reorganisation, we will get on with delivering real improvements and change. The next Labour government will inherit a “patchwork quilt” of regional, sub-regional and local structures of economic governance – uneven and inconsistent, threadbare in some places and multi-layered in others. We are not interested in tearing it up, but in finding ways of strengthening and extending partnerships between businesses, communities, and elected leaders within and across areas.”

Consistency must surely be a good thing, with shifts in structures blamed for the loss  of institutional memory and organisational improvements which can only happen over time. But despite this consensus, if the UK is serious about spreading economic growth more evenly, how far can LEPs go to achieving this? The recent Ernst and Young assessment of investment into the UK highlighted the fall in foreign direct investment in the North and Midlands, in part due to the demise of the RDAs. In terms of jobs and growth all the regions continue to lag behind London and the South East.

The Institute’s report questions the capability of the LEPs to make much difference to the economic divide within and between the regions. LEPs are for the most part invisible to both the public and key stakeholders. The main concerns are:

  • Resources: do LEPs have adequate resources? At the moment LEPs receive relatively little funding and certainly not enough to help rebalance the UK economy.
  • Accountability: If greater resources are to be made available, do LEPs have the right accountability structures? Many are subject to no scrutiny or independent evaluation.
  • Capacity: Are LEPs the right size to fill the void between national and local decision making? And will they end up competing rather than collaborating?

For the time being Labour is content to sign up to a consensus (with a greater focus on city deals and regional banks). With no new money on the table, it remains questionable whether tackling the regional divide will be a priority for Labour, even though it has the most seats in under-performing places. Tensions also remain between consistency and finding a more appropriate geographic scope and scale of agencies (if we deem LEPs too small and too many). If they are to remain, a key question must be whether any government can really make the LEPs work where the Coalition has failed, and, if so, how?

A new deal for the North

Michael Ward, Research Fellow, The Smith Institute

Public services in the north of England are being stretched to breaking point and another round of efficiency savings won’t improve the situation. We need a new approach and a new way of thinking.

The Coalition’s Office for Budget Responsibility has now established that the 2008/9 recession was deeper and more damaging than had at first been thought. And since the start of the austerity programme in 2010 the economy has flatlined.

This lack of growth is serious for the public sector. With the economy grinding along at a far lower level of activity than had been anticipated, tax revenues are not there to fund existing levels of public services – let alone to cope with increased demand or demographic change.

The coalition originally expected five years of squeeze, followed by a period of recovery. But this time, unlike past recessions, the economy has not bounced back. Austerity is now forecast to continue at least until 2018. As a report from the Smith institute (Public service north: time for a new deal?) pointed out this week, happy days are certainly not here again and particularly so in the North.

Now some services, notably the NHS, have been ‘protected’. The trouble is, logically, if you propose overall cuts, and then protect some services, other policy areas are hit even harder. Thus, the cumulative cuts to the DCLG’s Communities budget – covering, among other things, much of the social housing budget – are forecast to reach 70% by 2018.

In addition, the national tax base is declining. As North Sea Oil production passes its peak, so tax revenues from oil production begin to fall sharply. As environmental taxes begin to change behaviour (for example, as fuel duty encourages manufacturers to develop more fuel-efficient engines), so the yield from these taxes goes down.

Corporation tax rates are increasingly set with reference to tax rates in other jurisdictions, as countries jostle to attract footloose investment.

On top of all this, the local government finance system does not serve the needs of the north well. The tax base – for council tax and business rates alike – is now heavily concentrated in London and the South East. Since 2010, the grant system has become less redistributive.

Grants that used to be targeted on the areas with the highest needs have been ‘rolled in’ to the general grant – and, in turn, some of that general grant has been taken out of the formula to fund the government’s New Homes Bonus – which favours more affluent areas and the South.

All this amounts to a car crash for public services in the North. As Julie Dore, leader of Sheffield City Council’s Leader, said last year: ‘To have another three years of cuts will cause the whole social infrastructure to collapse and services will go.’

So what needs to happen?

  • First, the key redistributive elements of central government support to local government need to be restored, giving poorer communities a fairer share;
  • Second, councils and trade unions need to work together to drive up service productivity. There are no quick fixes – but without this, both jobs and services will go; and
  • Third, service providers and civil society across the North need to work out what the deal is for the future – an alliance for change under the umbrella of ‘Public Services North’.

It is time to face the big questions:

  • As a society, what will we provide through the state, what through the market?
  • What services will be provided by local government, what by central?
  • How will we pay for public services, through taxation or user charges?

These choices will not simply go away after the next general election. Any incoming government will face serious constraints on what it can promise. Neither is there any easy way out for service providers.

This article first appeared in Public Finance