Local Government is committed to working with the new Welsh Government to achieve:
- A commitment from the Welsh Government to fully fund all new burdens that arise as a result of changes in Welsh Government or UK Government Policy;
- The protection of Local Authorities’ ability to undertake prudential borrowing and the availability of capitalisation directions;
- A commitment to protect all current methods of funding capital investment and to explore and implement new potential funding streams including Local Asset Backed Vehicles (LABVs) and Tax Increment Finance (TIF);
- A commitment to reduce the proportion of funding provided through specific grants by transferring existing grants into the unhypothecated settlement and funding new policies through the unhypothecated settlement wherever possible;
- A commitment to respect the principles of local democracy in the setting of local taxation and remove the power to cap; and
- An agreement to review the balance of funding in local authorities in Wales.
Background:
Local government finances are under great pressure as public expenditure is reduced while public expectations and demand for local services increases. The local government settlement for 2011-12 sees a reduction in revenue funding of ¬1.4%. Prospects for future years are only a little better.
Capital funding however has seen a much greater reduction of -19.7% in 2011-12. Such reductions could lead to future increased costs associated with
- old and crumbling infrastructure – congestion caused by potholes, social costs of poor quality housing;
- an infrastructure not designed to cope with the effects of climate change with an increase in flooding and extreme weather; and the increase in health problems caused by pollution, poor living conditions and poor safety standards.
Capital funding is also crucial to the delivery of service transformation – new ways of working often require new infrastructure.
It is recognised that we cannot wish these problems away by wishing for more money from the Treasury. We need to consider innovation in forms of capital finance including putting public sector equity to work in more flexible partnership models with the private sector. Councils have made good use of the flexibility of prudential borrowing, but greater flexibility can be achieved by removing the ring fencing from funding streams, removing council tax capping so that communities can invest in infrastructure and giving councils more ability to raise new revenue streams to support borrowing such as tax increment financing and user charging. One of the fundamental principles of local democracy is the setting of local taxation levels by local councillors who are then held accountable for those decisions by the local electorate. Capping powers are a direct contradiction of this principle and should be abolished.
An essential tenet of the relationship between central and local government is that any new initiative or policy that central government wishes to introduce which will place a financial burden on local government should be fully funded. The financial implications should be worked through by both partners, fully understood and addressed.
The WLGA believes that central funding for local government should be un¬hypothecated. The percentage of government revenue grant that is hypothecated has risen to almost 20%. Hypothecation focuses attention on how money is spent on delivering services rather than the benefits and outcomes that those services deliver and limits the development of innovative ways of achieving those outcomes, perhaps in more cost effective ways. Hypothecation also escalates the administrative costs of funding as detailed records need to be kept and audited within both the Welsh Government and local authorities.
If we are to increase the capacity of local government to innovate in response to this challenging era we need to reverse the extent to which local government has become reliant for much of its funding from the Welsh Government. Consideration should therefore be given to new models of funding, such as the relocalisation of the business rates (with an appropriate equalisation scheme to protect more deprived areas).