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Damping leads to 'perverse outcomes'

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Half of English upper-tier authorities have seen their grant allocation affected by “perverse outcomes” in the local government financial settlement, fresh analysis has suggested.

The grant allocations of half of English upper-tier authorities has been affected by “perverse outcomes” in the local government financial settlement, fresh analysis has suggested.

The research is published in the wake of council leaders bitterly disputing ministers’ claims that the new total ‘spending power’ calculation used to allocate grant had produced a fair settlement.

The analysis by Coventry City Council suggests the use of ‘damping’ is a prime culprit for some of the more “counter-intuitive” results - but that a more equitable settlement could be achieved.

Damping has historically been applied to formula grant allocations to protect councils from volatile changes, which the system would otherwise cause (see table 1). However, it has always been a bone of contention between different classes of councils.

Coventry’s director of finance and legal services Chris West said the grant allocation system relied on close parity of grant and council tax changes, as has been the case in previous years.

But with central government grants set to be cut by 10% while council tax is frozen in this settlement, the damping system cannot work fairly, he claimed.

Mr West said the fate of Surrey CC and Birmingham City Council illustrated so-called ‘perverse outcomes’.

“Without damping, Birmingham loses 6.6% in resources, compared with its 2010-11 spending power. Despite high relative needs, it loses £21m through damping, leading to an overall [spending power] loss of 8.3%,” he said.

“Surrey CC … is set to gain £62m through damping - its loss reduces from 7.8% prior to damping to just 0.3%. Surrey receives more through damping than any other authority - yet it is facing the second-best outcome for all upper-tier authorities.”

However, Mr West argues below that if ministers applied damping to spending power data rather than solely to formula grant, a fairer solution could be achieved (see table 2)

Frances Foster, chief policy officer of the Special Interest Group of Municipal Authorities, declined to comment directly on Coventry’s research but said

some of its messages chimed with its position: “It would be fairer if everyone was given 4.4% cut in spending power, which is the national average.

“It would mean that some councils who are currently protected by the ‘floors’ would get substantial grant cuts but surely this would be fairer than a system that gives Surrey £62m more than they are supposed to get based on need and only a 0.3% cut in spending power.”

Paul Woods, lead technical finance adviser to the Association of North East Councils and a ‘core adviser’ to the Local Government Association, said he agreed with the concept of applying “damping on a wider basis, not just to formula grant”.

However, he said alterations would need to be made to the Coventry model, not least because some of the Department for Communities & Local Government data used was inaccurate.

DCLG said revenue from council tax, along with other income, such as grant, determined the overall level of a council’s spending power.

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