Briefing on Local Government Finance Formula Grant Distribution Consultation

The coalition government released its consultation document on changes to formula grant on 28 July 2010.

This briefing:

• Highlights the most significant changes that affect London local government
• Provides a summary of the proposals, and
• Gives a timeline for London authorities to respond to the consultation.

Overview

The period covered by the proposals refers to 2011-12 “and beyond”, but it is not clear how far beyond. The Secretary of State has indicated (though not finalised) two two-year grant settlements for 2011-12 & 2012-13, and 2013-14 & 2014-15 with the more significant change taking place following the review of local government finance (to report in 2012) from 2013-14.

It is notable that proposed levels of floor damping have not been specified in the consultation document (CLG has also raised the possibility of a negative floor). This is significant as, with the majority of London authorities relying on damping, the floor is likely to be the most important determinant of cash funding in 2011/12 and beyond. Given London’s reliance on floors, the impact of the Area Cost Adjustment (see below), and general funding uncertainty, London Councils is inclined to push for maximum floor damping.

The most significant impact on London is the proposed adjustment to Area Cost Adjustment. This is discussed below. The proposals in respect of the Environment, Protection and Cultural services are significantly milder than government’s earlier proposals (a reduction of £450 m or 11% of undamped grant), which London Councils argued strongly against in the Settlement Working Group.

The consultation addresses issues that have, generally, been discussed already between central and local government. However, emerging new policies may subsequently change formula grant, for example, the potential impact of academies on the quantum and distribution.