Audit Scotland on Council Finance

Audit Scotland have published their annual  Financial Overview of Councils . It doesn’t paint a happy picture, in fact it should probably come with a soundtrack.

The report talks of ‘significant challenges’ for Local Government finance.  If that sounds like accountant speak for bad things – it is. Boiled down to its absolute basics they say “All councils face future funding gaps that require further savings or a greater use of their reserves.” For “further savings”  read “cuts.

The reports says that councils are, generally speaking, managing their finances well but that funding gaps are developing which will mean either more cuts or greater use of council reserves.  They urge councils to do more long and medium term financial planning but acknowledges that single year grant funding from the Scottish Government can cause problems with this.

 Overall Council Spending is at £19.5 billion. This is lower than in 2011/12 although spending on some services has increased - the most obvious being social care due to rising demand. Some councils are overspending on their social care budgets and Audit Scotland warn that this needs  to be tackled (BTW  that isn’t accountant speak for cuts – they mean that councils should be doing better at saying how much they will be spending on particular services).

Scottish Government grants are councils’ major source of income. Between 2010/11 and 2015/16, Scottish Government funding (combined revenue and capital) for councils reduced in real terms by around £186 million (1.7 per cent) to £10.9 billion. Taking into account 2016/17 funding, councils have experienced a real-terms reduction in funding of 8.4 per cent since 2010/11.

Councils have usable reserves of £2.5bn that can be used to support services . Most (23) Councils added to their reserves in the last year. Reserves can be used to support services but obviously this is not a sustainable source of long term funding. The Commissions estimate is that Councils are planning to use a total of £87m ( 75) of total reserves  in the coming year to plug gaps in funding . Reserves are what might be reasonably considered as rainy day money – and it might be reasonably considered to be wet weather  so there use to maintain services and jobs is a good thing. But as Audit Scotland point out , this is hardly a sustainable method of funding services.

Recent years have  seen a decrease in the amount of funding coming from Council Tax and in increase in both the number of services for which councils charge and the amount charged.  Councils are criticised for not being clear about how charging decisions affect local citizens.

Around 2250 staff  took packages and left Local Government in the last year giving a total of just over 13 000 staff leaving councils in the last five years .   Audit Scotland note that equal pay ‘remains a substantial issue’ for local government – they will publish a report on this in 2017

Councils spend around £1.5bn a year on servicing debt.  Most tales the form of traditional fixed interest rate loans. The exceptions to this are PFI /PPP/NPD and LOBO’s ( Lender Option, Borrower Option)  loans. The commission notes that PPP/PFI/NPD predict ( repaymants are often inflation dependent – so exact repayment levels  are more difficult to plan for) . This just backs up the case that UNISON Scotland has made that effort needs to go in at both council and Scottish Government Level  to explore either buying out or Combating Austerity toolkit these projects. It’s also the case trhat the Public Works Loan Board isn’t always the cheapest way of doing things either . Some ideas that might help kget the cost of debt down are explored in our combating austerity toolkit     

Looking ahead Councils are expecting demographic changes to put demands on key services like social care and are assuming a ride in the wage bill of between 1%-1.5% in each of the next two years. Overall  councils anticipate an £87m in-year shortfall between their  General Fund revenue income (before using reserves ) and expenditure. That’s after approving savings or cuts of £524m. You hum it he'll play it. 

In other news councils are also urged to do  more long and medium term financial planning but acknowledge that single year grant funding from the Scottish Government can cause problems with this.

The Audit Commission are also making it plain that  Councillors need to get better at scrutinising the plans put to them by senior officials Councils need to get better at explaining their financial position – so that it’s in an  understandable format for a wide audience.  Being polite accountant types who talk about savings rather than cuts they don’t say any more than that – but perhaps they might be thinking that the need  for councils to explain things might be about to go up sharply. For all too obvious reasons,  altogether now 

Under Pressure

The latest Audit Scotland report on local government: An overview of local government in Scotland 2016, does not make for cheery reading. Revenue funding is now 11% lower than 2010/11 at a time of increasing demand. The report points out that, so far, councils have focused on “incremental savings to existing service” but with more cuts in the pipeline “councils should be evaluating options more significant changes to delivering services”
This confirms, albeit in management speak, what UNISON has been saying: that salami slicing is no longer an option and that without increased funding local government will no longer be able to deliver its current level of services.

The report confirms that savings have been made through job cuts and that more are planned due to the “significant funding reductions to come” and again confirms UNISON’s concerns about the impact of the loss of skilled staff on service delivery now and in the future:
The report calls on authorities to ensure that they have
“people with the knowledge, skills and time to design develop and deliver effective services in the future”
Public satisfaction with services is already dropping as the cuts begin to bite.

Key financial pressure on local government

Funding reductions
Increasing pensions costs
Reduced financial flexibility
Equal pay and the living wage

Key service pressures
Increased demand through demographic change
Health and social care integration
Service performance
Staff reductions

Local government delivers essential services across Scotland and requires adequate funding. The Scottish Government needs to ensure that local government is funded properly to meet the priorities the Scottish Government sets for it (e.g. expanding childcare hours, teacher numbers) and has access to raise money locally through fair taxation to meet their own local priorities

The report contains lots of useful information for UNISON campaigns against cuts and a self assessment tool for councillors to support them in their work. This is a useful tool for branches in analysing management plans and will be added to the UNISON anti-cuts toolkit.

UK Budget 2016

It is a typical Tory budget. There is plenty of middle class welfare at the expense of workers and the disabled, together with further cuts to public spending. I take a look at the elements that most impact on UNISON members in Scotland.

While the sugar tax (more accurately a levy) will make the headlines tomorrow, it is largely a distraction from some pretty bad economic figures. In particular, the growth figures for the economy are revised down and borrowing targets have been missed. The UK economy is £140bn smaller than the Chancellor planned due to spending cuts, low productivity and weak wage growth. George Osborne has clearly not heard of the maxim; ‘when in a hole, stop digging’ – because his solution is to drag the economy down further with more cuts and pushing households into greater debt. 

So let’s start with public spending. The bad news is £3.5bn of extra cuts from last November’s plans. The slightly less bad news is that they don’t kick in immediately – in fact they now drag past the date of the next UK General Election. This chart shows the changes.

This snip from the OBR risk table shows the revenue and capital cuts more clearly. In particular, note the line on public service pensions. This is not because they are actually costing more, but rather because he has changed the discount rate. This is the assumed investment return used in a present value calculation of assets. Sounds technical, but it comes with a big price tag for public services.

For Scotland, this means an immediate Barnett consequential of £650m in additional spending. However, yes you knew there would be a ‘but’, that still means £1bn (4.7%) of cuts by 2019-20.  We also still don’t know the Barnett impact of the £3.5bn additional UK cuts; because they haven’t said which English departmental spending they will come from. There could be additional pain for local government if the SLGPS has to change its discount rate in line with the Chancellor’s lead.

The OBR also publishes its estimate of the revenue from Scottish taxes in this chart. 

Scotland’s share of UK income tax is falling, but slightly less than previously forecast.

This chart shows the proportion of total taxpayer income by income bands. This reinforces the points made in the recent IPPR Scotland paper regarding taxation choices. In essence all good things have to be paid for, and by middle income taxpayers as well as the rich.

The next Scottish Government will be left with some other tricky decisions as a consequence of the changes in personal allowances. Increases in personal allowances at the bottom are dressed up as benefiting the lower paid, when in reality they also benefit everyone across the tax bands – they are not a progressive tax cut. The increase in the higher tax threshold is a blatant tax cut for wealthier households, paid for by cutting benefits for the disabled by £1.4bn. Let’s hope the next Scottish Government doesn’t stand ‘shoulder to shoulder’ with the Tories on this one.

Another tax decision for the next Scottish Government is Air Passenger Duty. The SNP want to cut it by 50%.  The OBR forecast receipts rising from £3.1 billion in 2015-16 to £3.9 billion in 2020-21. Making the cut even more of a burden on the Scottish budget, not to mention the 60,000 extra tons of carbon emissions. Anyone really care about climate change?

The cut to Capital Gains Tax is more middle class welfare and taken with the cut in Corporation Tax will encourage income tax avoidance by shifting earnings from income to profits. The new ISA limit at £20,000 is higher than the average wage of a Scottish council worker, which gives a pretty clear indication of who benefits the most from this tax handout. 

The sugar tax may be a distraction tactic, but it is still a sensible public health policy – even if it is branded as the Irn Bru tax in Scotland. It probably could have been introduced a year earlier than planned and cover a wider range of sugar products. It might bring as much as £52m in Barnett consequentials according to some calculations today. Obviously less if it has the desired effect in changing manufacturers behaviour. 

Buried away in the OBR report are a few other interesting points for UNISON members.

Average earnings growth in the second half of 2015 has been lower than expected in November and the OBR has revised down average earnings growth. They also expect real household disposable income growth to have peaked at 2.9% in 2015 and fall to average 1.7% a year from 2016 onwards. Inflation is expected to increase as this RPI chart shows.

The hollow rhetoric of a ‘workers budget’ is exposed in this chart, which shows that it is those paying National Insurance and tax through PAYE who face an increasing share of tax. They can’t take advantage of the tax avoidance mechanisms.

The Chancellor is yet again relying on household debt for economic growth. I usually describe this as the scariest chart in the OBR report. Well it just got scarier!

No more talk of rebalancing the economy. Just as well as exports are forecast to decline.

The Chancellor’s decision in 2013 to increase National Insurance contributions will give him a £5.6 billion windfall, with around 50% of the extra burden falling on public sector employers in higher employer NICs. His so called ‘pensions choice’ exercise has also netted him an extra £0.9 billion for the whole of 2015-16, around £0.2 billion higher than assumed. The, sort of, good news on pensions is that there are no changes to tax treatment, although some sensible reforms are necessary. Salary sacrifice schemes that many workers rely on to pay their contributions will also remain. 

In summary, all that you would expect from a Tory budget. As UNISON General Secretary Dave Prentis said: “Six years of severe cuts to public spending have done little to pay down the deficit, despite the Chancellor’s promises. Yet still he insists on continuing with his failing economic experiment."

Jeremy Corbyn also sums it up well!

For those who also want to read the all important small print - here is the Red Book, mostly government spin. And the more useful OBR report, plus the devolution tax paper.

Scottish Government 'must do better' on preventative spending

The Scottish Parliament Finance Committee today warned that nothing like enough is being done in Scotland on preventative spending.

It is widely agreed that in key areas of public services the focus needs to shift from tackling symptoms of disadvantage and inequality to addressing root causes, with what the Committee described as a “decisive shift to prevention.”

However, today’s report from the Committee on the Scottish Government’s Draft Budget 2015-16 makes clear that “there is little evidence of the essential shift in resources taking place to support a preventative approach.”

This is damning, but UNISON welcomes the Committee recognising the reality of the situation.

As the report shows, radical changes in shifting resources to prevention are hampered by the scale of the financial challenges facing public services.

We are urging politicians from all parties to act now to put fairness and tackling inequality at the heart of economic policy and to look at the vast amount of evidence in favour of this.

Government spending in Scotland

The highly respected Institute of Fiscal Studies has produced a useful briefing on public spending in Scotland.

If we ignore the spin both sides of the referendum campaign have put on the report, it does give us a better understanding of Scotland's financial position. Some of the key points include:

Government spending in Scotland is around 9.3% of government spending in the UK, substantially higher than Scotland’s 8.4% share of the UK population. This means that spending per person in Scotland (£12,629) was 11% higher than for the UK as a whole (£11,381).

Spending as a proportion of GDP in the UK is 45.5%. Scotland ranges from 50.6% down to 42.7%, depending on how you allocate North Sea oil revenues. While this shows that Scotland more than pays its way in the UK - Scotland is also very sensitive to the level of economic output generated in the North Sea, which does vary significantly over time. The report highlights the OBR projections of falling oil revenue and a consequential £5.9bn 'black hole', equivalent to a 15% spending cut. However, oil revenue projections are notoriously unpredictable.

Household income in Scotland is a little (4%) above the UK average, but with wide variations between high and low income areas.

Spending on public services was £7,932 per person in Scotland, 16.6% (£1,128) higher than the £6,803 spent on average across the UK. In contrast, spending on benefits and tax credits was only a little higher per person. The higher spending is largely on devolved services. Revenue spending is 12.5% higher than the UK as a whole, whilst capital is 48.2% higher. This reinforces the point we were making to the Economy Committee this week on the risks of shifting revenue to capital.

There are significant differences in spending patterns in Scotland compared to the rest of the UK. We spend twice as much on agriculture and three times as much on enterprise and development. Ten years ago the pattern of spending was similar and this reflects different spending priorities in Scotland. Health and education have had smaller than average increases.

Since the introduction of austerity in 2010, Scottish cuts have been in similar areas to the rest of the UK. One exception is spending on housing and development.

Overall, a very useful study.

Councils lose out again in draft budget

The Scottish Government’s recently published draft budget states “Local government is a critical partner in leading the transformation of public services and enabling the innovation, co-production and partnership-working that is needed to radically improve wellbeing and outcomes for people and communities across Scotland.”

Fine words, but is the Scottish Government putting its money where its mouth is?

Tucked away in an annex to the budget document is a comparison of budget allocations by portfolio since the SNP’s first full budget in 2008-9. I have extracted the main portfolios and displayed them below as a chart and a table.

What they show is that local government is the only major portfolio to show an overall reduction in spending. The cynic might say, in difficult times push the difficult decisions as far away from ministers as possible – the ‘not me guv’ school of spin.

Even these tables mask real cuts in funding. The apparent increase in funding over the next two years comes largely from increased revenue from Non-Domestic Rates. The General Resource Grant to councils is being cut from £7.189m this year to £6.971m next year and £6.809m the year after. In real terms the cut is even larger - £6.841m and £6.564m.

In addition, a significant amount of spending is either ring fenced or has to be bid for like the Council Tax freeze, small business bonus, teacher numbers, police numbers (until totally centralised), change funds etc. Ministers get to make the ‘good news’ announcements, while councils announce the pain.

No one disputes that the Scottish Government has to manage a difficult budget imposed by Westminster. But within that budget there are choices to be made and councils are clearly the losers.

Scottish public services tackling climate change

UNISON Scotland has long argued that public services must lead by example in action on climate change.

In today’s Herald newspaper Paul Wedgwood of the Carbon Trust praises the world-leading legally binding climate targets in Scotland’s Climate Change Act.

And he says: “Action and leadership by the public sector will be the key to unlocking the scale of transformation required to create a sustainable Scotland by 2050.”

Yet he highlights that, of the recommended measures in carbon management plans developed by the Carbon Trust with 150 public sector bodies, two thirds have still to be implemented.