Local government funding is set to be further cut in 2014-15 as the chancellor used the Budget to switch resources to infrastructure and housing.
Council budgets in 2014-15 are set to be cut by a further 1%, a reduction of £220m, although the chancellor has protected local government and police from the 1% cut to be applied to most other departments in 2013-14.
The reduction in 2014-15 comes on top of the 2%, or £445m, reduction planned for that year which was announced in the Autumn Statement.
Across the public sector, the chancellor is seeking to cut resource funding by 1% over the next two years, totalling £1.1bn in 2013-14 and £1.2bn in 2014-15.
Turning to the June spending review which will set out 2015-16 budgets, Mr Osborne said “existing protections” will apply, although it is not clear what this means for local government.
The Department for Communities & Local Government is not one of the three protected departments – health, education and overseas aid. However, the special treatment shown in the Autumn Statement, when local government was exempted from a 1% cut in 2013-14, has now been repeated in the Budget.
As expected, capital spending was increased with a boost of £3bn a year from 2015-16 which the chancellor said would total £15bn over the next decade.
Mr Osborne said capital spending had been due to fall in 2015-16 but he had decided this was “not sensible” given the continued troubles in the economy.
Spending review allocations will be influenced by the chancellor’s decision to extend pay restraint into 2015-16 with a continued cap on public sector pay rises of 1%. Although the Treasury has no say in local government pay awards, the chancellor said local government budgets would be “adjusted accordingly” in the spending round.
Mr Osborne also responded to complaints that reforms to the single state pension are set to cost local government employers billions of pounds in additional National Insurance contributions.
Plans to scrap the second state pension have been moved forward from 2017 to 2016. The policy has always meant employees can no longer contract out of state pension requirements in return for reduced National Insurance contributions.
The chancellor said public sector employers – including councils – “will have to absorb the burden, as is always the case with tax changes”.
However, he said the government recognised the burden on employers: “Any spending review in the next Parliament will, of course, take the £3.3bn cost into account.
Mr Osborne said the income from the additional National Insurance income would be used by the Treasury to create an employment allowance which would pay the first £2,000 National Insurance costs of all private sector firms.
This would help small businesses create new jobs, he said. “It will mean that 450,000 small businesses – one third of all employers in the country - will pay no jobs tax at all.
“For the person who’s set up their own business, and is thinking about taking on their first employee – a huge barrier will be removed.”
Mr Osborne confirmed that the introduction of a cap on social care costs would be brought forward to April 2016 and would be set at £72,000, he said.
He added that individuals would be entitled to local authority support towards their care costs if their total assets were worth £118,000 or less. The plans had originally been set to take effect from 2017, with a £75,000 cap and £123,000 threshold.
The full Budget report says the reforms “should help an extra 100,000 people who would not receive any support under the current system”. The report confirms that the policy will be funded by an inheritance tax freeze.
Annual managed expenditure
The chancellor also indicated the government would make moves to limit ‘annually managed expenditure’ which, unlike departmental expenditure limits, gives government little control over costs.
“In practice it was annually unmanaged expenditure – and it includes almost the entire welfare budget as well as items like debt interest and payments to the EU,” he said.
Further details of how the government will limit “a significant proportion” of this AME budget will be set out in the June spending review, he said.
The move follows the reforms to council tax benefit which, as a Department for Work & Pensions responsibility, was AME spend but is set to become DEL next month when it becomes the responsibility of councils. This switch allowed government to cap the amount of money it will spend on the benefit.
Mr Osborne repeated his commitment to Lord Heseltine’s single pot of funding for economic growth, but he provided no further detail about how large that pot might be or what funding streams would be included.
As reported by LGC, the Treasury published on Monday a detailed response to Lord Heseltine’s review of economic growth policy and indicated that some skills, housing and transport funding would be included.
The response welcomed the vast majority of Lord Heseltine’s recommendations, but a number of them were only met in part including calls for ministers and permanent secretaries to be closely association with local enterprise partnerships and the creation of local growth teams.