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The comprehensive spending review

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With a funding squeeze and high voter expectations, the task ahead for local government is not easy, according to the LSE's Tony Travers

Islocal government its own worst enemy? The chancellor appears confident that councils will be able to provide a full range of services with a real-terms spending increase of 0.9% per year over the period covered by the 2007 comprehensive spending review. The NHS, by comparison, will be given four percent real increases per annum.

The government has learned that councils can somehow be forced to cope with small increases. Because they provide a basket of different services, partly funded from a local tax, it is easy forWhitehallto apply a squeeze. Cuts in, say, library opening hours or street cleaning can be blamed on the individual authorities that opt for such changes. Ministers can then point to other councils where these services do not face reductions as evidence of failure in those where cuts take place. Crucially, councils get the blame for whatever happens.

Local government's real 0.9% expenditure rise will equate to an overall year-on-year cash rise of about four percent on average. For individual services and authorities however, the allocation of revenue support grant (RSG) will inevitably be a bigger squeeze. Adult social care, the police and children's services will probably enjoy expenditure increases of more than four percent. So, highways, environmental services, leisure and fire and emergencies seem likely to face real-term cuts in resources.

Individual councils will have to wait a little longer before they receive their individual external funding allocations for the three-year period 2008-09 to 2010-11 also up about four percent on average a year in cash. Given the modest increases now proposed by the CSR, it is likely that the Department for Communities & Local Government will, once again, use a 'floor' to guarantee each council a minimum increase in its grant.

Following the funding debacle in 2003-04, ministers are far more concerned by stability than by a desire to achieve redistribution of grant. With overall central resources rising by a smaller percentage than in recent years, a floor of 2.5% or three percent seems inevitable. Such an over-ride to the year-on-year resource changes that would otherwise occur severely limits the possibility of making significant new allocations to councils with fast-growing needs. In the longer term, a series of tight, heavily-damped,RSG and schools' settlements sharply reduces the capacity ofWhitehallto use the grant formulae to target resources at new or growing needs.

Following proposals outlined in the report of the Lyons Inquiry, the government has put forward a bewildering array of possible reforms to the current arrangements for providing councils with an incentive to build up their non-domestic rate base. Councils are to be consulted on issues such as: should payments of a reformed Local Authority Business Growth Incentive scheme be calculated in relation to growth in their contribution to the national non-domestic rates pool or, alternatively, in their non-domestic rate base? There is also a choice of proposals for coping with councils that have a very large rate base.

There is to be a separate consultation on the introduction of a supplementary business rate.Lyonsproposed this, too, though he suggested a maximum local add-on of 4p in the pound, compared with the 2p in the pound proposed by the government. Authorities that want to use this freedom will probably wish to lobby for an upper limit nearer to 4p. Proposals for a planning gain supplement are likely to be replaced with a 'roof tax' on new developments.

Alistair Darling and communities and local government secretary Hazel Blears have committed themselves to council tax increases averaging no more than five percent. Universal capping lives on. The combination of council tax limits and low central funding increases can have only one consequence greater pressure on budgets.

Capital expenditure by local government is shown in the Treasury's plans as£0.1bn per year. Councils are to be expected to sell off£24bn worth of assets by 2010-11, 80% of the total for all government sectors. Predictably, the centre is putting far greater pressure on local authorities to dispose of assets than all other parts of the public sector.

The plans in the CSR were very much as predicted. Local government faces significant political pressure fromWhitehalland also from local electors. Social services for the elderly will have to grow, simply because of demographic trends. There are also dramatic pressures on councils with fast- growing migrant populations. In the absence of local freedom to determine tax levels and 'flat' grant totals, there is a growing risk that new needs will remain unmet.

Local government clients and users are often the same people as those who use the NHS or schools. The government must now be pressed to explain how, exactly, councils are expected to manage with so much less money than these favoured services. Paradoxically, the better local government copes with tight spending and efficiency demands, the moreWhitehallwill be able to cut its funding. Perverse incentives rule.

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