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					Provisional Local Government Finance Settlement for 2006/07 and 2007/08
Introduction

briefing

Provisional local government finance settlements for 2006/07 and 2007/08 were announced today, 5 December 2005, by the Minister for Local Government, Phil Woolas, MP. These settlements mark a significant change to the way that local government funding is allocated. Following a three year formula freeze a new approach is being adopted to calculate the grant allocation for authorities. Formula Spending Shares (FSS) and their associated control totals will no longer be used. Similarly, Assumed National Council Tax (ANCT) will no longer form part of the grant calculation. What has been described as a “four block model” is being implemented. The concept of FSS is being replaced by a Relative Needs Formula (RNF). More details are set out below. The creation of the Dedicated Schools Grant (DSG) is another significant change being made this year. DSG allocations should be announced later in the week. In addition, as the first step towards three-year settlements, the announcement made by the Minister for Local Government included details of two years’ of funding allocations. This briefing summarises the main points of the provisional settlements for 2006/07 and 2007/08.

Overview
Earlier in the day the Chancellor made his Pre-Budget Report for 2005. In his statement the Chancellor announced £305 million of additional funding for 2006/07 and £508 million for 2007/08. This means that, overall, formula grant for England is increasing by 3.0% in 2006/07 and by 3.8% in 2007/08. For London boroughs the average formula grant increase for 2006/07 is 2.6% and for 2007/08 is 3.5%. The use of grant floors continues to be a significant element of formula grant allocations. For social services authorities the floor has been set at 2.0% for 2006/07 and 2.7% for 2007/08. Damping continues to be paid for by scaling back grant increases above the floor. However, the capital adjustment has been removed from damping calculations. Provisional figures for 2006/07 give a Dedicated Schools Grant (DSG) of just under £26.6 billion (an increase of 6.0% over the baseline for DSG) and £28.2 billion for 2007/08 (an increase of 6.0%). 20 London boroughs will be on the grant floor in 2006/07 and 21 in 2007/08. Both the MPA and LFEPA are on the grant floor for both 2006/07 and 2007/08.

Changes to Structure: the four block model
Allocation of formula grant is no longer based on Formula Spending Shares. Ministers have decided to move to what is called the four block model. Authorities will receive: • • • • A relative needs allocation using Relative Needs Formulae (RNF) A reduction based on relative resources (the ability of authorities to raise council tax) A central allocation based on a per head amount An allocation to ensure a minimum increase in grant.

The calculation of the relative needs amount continues to be based on six main service areas and a capital finance allocation. There have, however, been two changes to the way that these blocks are made up. To reflect Every Child Matters, allocations for Children’s Social Care, Youth & Community and Local Authority Central Education Functions have been grouped to create a Children’s Services block. The capital finance block now only includes an element for the debt costs. Elements to take account of the potential for authorities to receive interest have been removed from the calculation.

Children’s Social Care
The formula used to measure relative needs for children’s social care continues to comprise two elements: a main needs element and a foster cost adjustment. The summer consultation only included one option for the main needs part of children’s social care formula. The exemplifications provided for this option highlighted a potential £190 million reduction in FSS for London boroughs. Work by the ALG and others over the summer highlighted a number of technical concerns with the way that the consultation option was developed. As a result, the DfES and ODPM undertook some further analysis that resulted in a small change being made to the structure of the formula. There are, however, still a number of technical concerns that have not been addressed. The foster cost adjustment element of the formula has also been updated. In response to concerns about the level of turbulence caused by the introduction of the new formula, Ministers have decided to damp changes in the relative need for children’s social care. For 2006/07 and 2007/08 a floor of 2.7% has been applied. This has been paid for by scaling back the increase in need for authorities above this floor.

Education Services
There have been two changes to the formula used to allocate resources for education services. When FFS was first introduced in 2003/04 funding for education was split between a schools block and Local Education Authority (LEA) block. At that time, Ministers decided that they wanted to damp changes in the schools block and, because that was the first year that a schools block was used, it was also necessary to damp changes in the LEA block. Separate damping for both the schools block and the LEA block continued until 2005/06. Separate damping for education services is no longer used in 2006/07.

The second change has been to remove the specific allocation for further education residual pensions costs. There have also been some changes made to the data that is used in the calculation. The numbers of pupils used in the formula is now taken as at January for all age groups. Previously, secondary school pupil counts were taken as at September. Also, in line with the use of population figures in other parts of RNF, population projections are used in the calculation of needs for the youth & community block.

Social services for younger adults
The younger adults’ needs formula has been updated based on one of the options in the summer consultation paper (SSA2). This option, which is based on a statistical analysis of the numbers of clients in a sample of 18 authorities, resulted in a potential reduction in FSS of London boroughs of around £150 million. As with the children’s social care formula, changes in younger adults’ need have been damped with a floor of 2.7%.

Social services for older people
A number of changes have been made to the formula for social services for older people. Changes to the needs part of the formula and the low income adjustment are based on the only options from the consultation paper. Two options were included on potential changes to the sparsity element of the formula. Rather than the more radical change to a distance based measure, Ministers have decided to update the indicator to one based on a sparsity measure of older people.

Police and Fire
Changes to the way that police and fire pensions are to be funded have already been announced. These changes result in relatively small transfers from formula grant. The police needs formula is based on a statistical analysis of crime broken down into seven categories (option POL2). However, to avoid turbulence, through damping all police authorities will receive around the average 3.2% increase in grant. A range of options for changes to the fire formula were presented in the summer consultation paper and many of these have been implemented. Fire authorities will be required to pay back around half of the modernisation funding in 2006/07 and the remainder in 2007/08.

Highways Maintenance
Only minor changes were proposed to the highways maintenance formula. Two changes have been introduced. Census data have been updated to be taken from the 2001 Census, and traffic flow data used are changing to three-year averages. The other change presented in the summer consultation paper was the potential introduction of back lanes data. Ministers have decided not to introduce back lanes into the formula for 2006/07.

Environmental, Protective and Cultural Services
The needs formula for EPCS now uses 2001 Census data. However, the Census data have been adjusted to reflect the population revisions made in 2004. The formula has also been amended to reflect the additional £350 million of funding added to the settlement for the extension of the concessionary fares scheme. Although an updated version of day visitors data was included in the summer consultation paper, the 2006/07 settlement continues to use the old data.

Area Cost Adjustment
The consultation paper proposed a range of changes to the Area Cost Adjustment (ACA). Probably the most significant of these could have been a change to the ACA geography. However, no geography changes have been made. The ACA is made up of factors measuring differences in two types of cost. Wage levels have the greatest influence on the ACA , but an element reflecting differences in rates costs is also included. The summer consultation proposed two options regarding the rates cost adjustment. One option was for the adjustment to be removed from the calculation. The other option was to reduce the weight given to the rates cost adjustment. Ministers have decided to retain the rates cost adjustment, but with the reduced weight proposed in the consultation paper. One other change has also been made to the calculation of the ACA. The full dataset from the Annual Survey of Hours and Earnings (ASHE) has been used. This provides a slight increase in the amount of wage data that feeds into the ACA calculation. The final option presented in the summer consultation paper was the possibility that a smaller number authorities would be given an ACA factor above 1. In the event no changes have been made to the way that the lower limit is set.

Consultation arrangements
The deadline for written responses to the consultation is 11 January 2006. Local authorities wishing to meet with Ministers during consultation to make representations on the settlement proposals should ring 020 7944 8989 before 30 December 2005.

ALG LGF Division – 5 December 2005 Contact: Stephen Lord Antony Brown Nicola Morton Tel: 020 7934 9942 Tel: 020 7934 9939 Tel: 020 7934 9935 stephen.lord@alg.gov.uk antony.brown@alg.gov.uk nicola.morton@alg.gov.uk


				
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