What the government’s spending review means for social care

By Mithran Samuel and Rachel Carter

What is the spending review?

The spending review will set government spending levels from 2016-17 to 2019-20, and in doing so shape the amount of resource local authorities in England will have over this period to spend on services including social care. It will be delivered by chancellor George Osborne on 25 November.

Overall spending will have to shrink in line with the government’s plan to eliminate its budget deficit by 2019-20. But the impact on different services will differ significantly. The NHS, schools, overseas aid and defence will either see their budgets protected or increased slightly.

According to analysis of the government’s latest plans, day-to-day spending on other services must fall by 18.8% (£23.7bn) over this period. This includes government spending on local authorities (Source: Institute for Fiscal Studies).

Why is it so important for social care?

The 2015 spending review is so critical because it follows five years of cuts to local government budgets determined chiefly by the 2010 spending review. While councils have striven to protect children’s and adults’ social care from spending reductions, through efficiency savings and substantial cuts to other services, local government leaders say this strategy is running out of road.

This is particularly because both adults’ and children’s services are facing mounting levels of demand, driven by demographic and economic pressures. So further reductions will hit local authorities – and social care service users and professionals – hard. Yet government has given no indication that it will extend the largesse it has shown the NHS, schools, overseas aid and defence to social care.

What is local government asking for?

The Local Government Association and Association of Directors of Adult Social Services have produced a number of submissions setting out what they want from the spending review for local authorities in England including:

• The LGA’s overall spending review submission, published in September 2015 – covers all local government spending).
• The LGA and Adass’s joint submission on adult social care (Oct 2015).
• Adass’s separate joint submission with bodies representing NHS leaders, care providers and social care charities,

Adult care pressures

The LGA and Adass say the following pressures must be met by the spending review in relation to adult social care:

1. The national living wage. This will set a wage floor of £7.20 an hour for people aged over 25 from April 2016, and is expected to rise to over £9 an hour by 2020. This is due to have a substantial effect on care providers; those partly or predominantly serving a publicly-funded clientele will need councils to cover the increased costs. The LGA says that the additional annual cost for council adults’ social services departments will rise to £1bn by 2020.
2. General pressures on adult social care. These pressures are the result of inflation and demographic pressures. Combined with the impact of the national living wage, the LGA estimates these will add £2.1bn to annual costs for councils in adult social care.
3. Market pressures. Besides inflationary/demographic pressures, the LGA and Adass claim there are (as yet unquantifiable) other pressures on councils arising from weaknesses in the care market. These are the result of years of fee squeezes for providers that has resulted in the risk that many providers will exit the market (both for care homes and home care) and that those remain will face increasingly struggles to remain profitable and recruit staff on the wages they are able to afford (particularly as the economy recovers in other sectors such as retail).
4. The Deprivation of Liberty Safeguards. Based on estimates from the Law Commission, the LGA has said that councils need an additional £172m a year to meet the costs of the Cheshire West judgement in relation to the Deprivation of Liberty Safeguards.
5. The Independent Living Fund. The LGA has warned that councils need to have funding to meet the ongoing requirements of taking responsibility for clients formerly served by the Independent Living Fund. The ILF spent £271m in England in 2014-15 (the last full year before its closure) and the LGA wants to see councils’ budgets boosted by something like this amount to compensate them for their added responsibilities.

Children’s services pressures

The LGA has also highlighted the following pressures on children’s services:

1. Rising demand for children’s social care. The LGA says that since 2008, there has been a 22% rise in children’s social care referrals, a 65% rise in the number of children subject to a child protection plan and a 16% rise in the numbers in care. The LGA also points to increased referrals as a result of high profile child sexual exploitation cases, while the number of pupils with special educational needs related to learning disability is expected to rise by more than a quarter from 2014 to 2023.
2. The LGA is warning that councils are facing pressures from two directions. On the one hand, the number of unaccompanied asylum seeking children supported by councils is rising sharply, growing by 29% in 2014-15. On the other, the Immigration Bill includes provisions to change the support provided to failed asylum seekers and other migrants. According to the LGA, these are likely to lead to an increase in the numbers of asylum seekers and migrants with no recourse to public funds, who may become destitute and require assessment and support from local authorities.

Separately, in a letter to education secretary Nicky Morgan following May’s general election, ADCS president Alison O’Sullivan said it was “notoriously difficult to estimate the funding gap for children’s social care”. However, she said it was “vital that planned spending for children’s services in the next parliament is based upon the twin realities that demand and demographic pressures in the child population, particularly in areas of deprivation, will continue grow”.

She pointed to a correlation between deprivation and rates of referral, numbers of children subject to child protection plans and numbers of children who are looked after.

What will happen if the pressures are not met by extra funding?

Councils are saying that they have almost reached the end of the road in terms of both making efficiency savings and using money from other services (libraries, culture, road maintenance etc) to safeguard social care. The LGA estimates that councils diverted £2.5bn from other services and made £2.5bn in efficiency savings to protect adult social care from 2010-15 (Source: LGA/Adass Spending review submission).

In relation to adult care, the LGA and Adass say that the consequences will be:

• Providers exiting the market.
• More recruitment challenges for those providers who stay.
• More risks of legal challenges for councils for not meeting their statutory duties under the Care Act.
• Less dignified care for people and more unmet need.
• More cuts to preventive and non-statutory services that will just store up problems for the future in terms of increased need.

The last point was echoed by ADCS president Alison O’Sullivan in her letter to Nicky Morgan. She said that the association was worried that any future cuts to spending would impact in particular on non-statutory services such as children’s centres and youth provision, “reducing capacity in the system to intervene early before problems escalate”.

What is the government planning to do through the spending review?

All unprotected government departments have been asked to model cuts to their budgets of 25% and 40%, including the Department for Communities and Local Government (DCLG), which provides most government spending on local authorities. It was announced on 9 November that four government departments had pledged to each cut their budgets by 30% over the spending review period, including the DCLG. However, this will not apply to its spending on local government, so we’re no clearer about how local government will be affected.

But the government’s plan is to, essentially, do away with central government funding for local authorities so that, mostly, all local government revenue is raised locally. This will be done by allowing local authorities to (mostly again) retain all of the income from the business rates they collect locally. Currently about half of this is returned to the Treasury with most (though not all) of this redistributed to local authorities as government grant (known as ‘revenue support grant’).

The government plans to give all of this money to local authorities. On paper this will mean local authorities will have more money (because more is collected locally in business rates and then given to the Treasury than is redistributed back to councils). However, George Osborne has said that in return for the extra money he will give local authorities more responsibilities (ie burdens) than they currently already undertake.

So local government could lose out in a way that is equivalent to a cut in central funding by being given more burdens than is equivalent to the additional money they are getting in business rates, i.e. they could have more money, but they have so much more to do that they will only be able to manage by cutting existing services.

Where does local government get its money from?

In 2015-16, government figures indicate that of around £48.95bn in revenues collected by all local authorities in England (including district councils and fire authorities):

1. 42% came from council tax.
2. 21% came from business rates collected and spent locally.
3. 19.5% came from the main government grant (revenue support grant).
4. 7% came from the Better Care Fund, providing NHS funding for adult social care (though this claim has been strongly disputed by the LGA on the basis that it allocates all of the NHS’s contribution to the Better Care Fund to adult social care, when much of it will have been spent on health services).
5. 10.5% comes from other small government grants.

(Source: DCLG)

How the spending review may impact on local government?

All of the spending areas above will be affected by the spending review but in different ways.

Council tax

Council tax is the safest source of local government revenue as councils know that it is not going to get cut. But its growth will almost certainly be restricted.

Each year, the government sets a council tax increase limit beyond which councils must hold a referendum to enable them to sanction the higher increase. This year the referendum threshold was 2% so rises of this level and above required a positive referendum vote or could not go ahead. Only one referendum was held this year, by Bedfordshire Police, and it was roundly rejected. It would be surprising if the government permitted a higher referendum threshold for 2016-17 or for the rest of the spending review period.

The other way in which government has limited council tax increases is by giving councils a grant in return for freezing rates. This year the grant paid was equivalent to a 1% rise in council tax.

Overall, in 2015-16, local authorities that did not accept the freeze grant increased council tax by 1.3% in England (Source: Cipfa).

Also, even though council tax is the biggest source of local government revenues overall, its share differs significantly from authority to authority. Generally, poorer authorities are more dependent on central government grant and richer ones more able to raise revenue through council tax.

So wealthier councils are in a good position here as not only will they be getting most of their revenue from council tax but they will be able to boost this share of their revenue. Poorer authorities are in a bad position because they will be getting, say, a quarter, of their revenues from council tax, meaning they can only boost a small share of their revenue.

In December, when it announces the local government settlement for 2016-17, the government will estimate how much council tax will go up by to work out what will be happening overall to local government budgets.

The government is yet to indicate whether it will offer councils a freeze grant. In a forecast published in July, the independent Office for Budget Responsibility assumed that council tax would rise in line with the rate of consumer price inflation. This is currently zero but is due to rise to 1% next year and then rise gradually to 2% by 2020. This would mean that council tax rises slightly more quickly from 2017 onwards than in 2015-16, unless the chancellor seeks to restrict this either through a freeze grant or by lowering the referendum threshold.

The LGA will strongly resist any moves to reduce the referendum threshold below 2%; indeed they want to see it lifted altogether.

Business rates and revenue support grant

George Osborne has said that revenue support grant will be phased out by 2020 with councils able to (mostly) keep all of their business rate income instead.

Currently, business rates is divided into two halves: the “local share” and the “central share”. The central share is sent to the Treasury and redistributed as revenue support grant (RSG), which is distributed according to the needs of each area.

The local share is mostly retained by the individual local authorities except for a system of “tariffs and top-ups”, under which richer areas pay a “tariff” to top up the business rate income of poorer areas. So this is another way of redistributing money but less extensive than the revenue support grant.

By 2020, all business rates will be part of the “local share”. There will be no revenue support grant.

In 2015-16, the central share of business rates was £10.2bn, which was greater than the level of RSG (£9bn) ie councils collectively sent £1.2bn more business rates income back to the Treasury than they received back in RSG. Osborne has said that, by 2020, all of this money will be kept by local government; but in return for the extra money councils will be given more responsibilities.

Osborne has also said that the system of tariffs and top-ups will continue but will be fixed. So, if you are a rich authority you will still be paying a tariff to top-up poorer authorities; but from 2020 onwards at least, this tariff will not rise in line with business growth; as the authority rakes in more business rate income it will get to keep this increase rather than see any of it redistributed away to poorer authorities.

It seems unlikely that this initial level of tariffs and top-ups will be as redistributive from richer to poorer areas as revenue support grant (if it were, what would be the point of the reform?) so it is hard to see how poorer areas will not be disadvantaged. And if local authorities are able to keep all of the growth in business rates thereafter, then it is hard to see how this will not widen inequalities between richer and poorer areas (See this LGA report for more information on the system of tariffs and top-ups).

Osborne has also said that, while currently business rates are set at a uniform rate, in future councils will be able to set a lower rate than this to attract business. Only combined, city-wide authorities with an elected mayor will be able to raise business rates above the uniform level – and that will only be to pay for new infrastructure and if they get the support of the local business community to do that (Source: George Osborne’s Tory party conference speech, 2015).

So, the spending review should determine the following:

• How quickly business rates will replace revenue support grant from 2016-20.
• How much extra money councils will have each year through the replacement of RSG by keeping business rates.
• What extra responsibilities councils will have to fulfil as a result of having this extra money and, whether the burden of these additional responsibilities is equivalent to the additional money or greater than it, effectively amounting to a cut.
• Levels of tariffs and transfers and any further measures that will be taken to protect or compensate poorer areas for this reform.

The Better Care Fund

The Better Care Fund, launched in 2015-16, will continue for each year of the spending review period. Under this, NHS England will be required to mandate clinical commissioning groups to place a sum from in a pooled budget with local authorities. It may be that one or two specific local government grants for adult social care will be placed in this too, as happened in 2015-16. But the bulk of the mandatory part of the BCF will continue to come from CCGs – this year £3.46bn of the £3.8bn mandatory part of the BCF came from the NHS (Source: DH/DCLG). This was topped up by £1.5bn in voluntary contributions to the BCF from CCGs and councils.

So the question is whether the sum that NHS England is mandated to contribute will increase. The government has already promised that NHS spending in 2020-21 will be £8bn higher than in 2015-16 in real terms (ie once inflation has been taken into account). NHS leaders feel that all of this £8bn (and more) is needed to keep the NHS on its feet and are strongly opposed to siphoning some of it off to social care through the BCF. It is worth noting that the government’s promise on NHS funding could be interpreted more or less generously (see this Guardian article) with knock-on impacts for the BCF/social care.

Specific government grants

There are a multitude of other government grants that councils currently get that appear to amount to about 10% of local authority revenues. These are designed to help councils meet specific responsibilities. Here are some examples of grants for adult social care in 2015-16.

It would be surprising if these grants were not reduced significantly in order to contribute to the government’s planned savings target for local government. One option for the government would be to make the responsibilities relating to these grants part of the additional responsibilities that it expects councils to perform from the additional income they will be receiving from keeping their business rates. And in that case it becomes a question of whether the money councils are losing through the reduced specific grants is greater then what they will be gaining in business rate income.

How likely is the government to listen to local government’s wishlist?

There are a few crumbs of comfort for local authorities:

• The CQC said that it understood the government was planning to mitigate the impact of the national living wage on the care sector through the spending review (Source: CQC State of Care report 2014/15).
• The is strong support from Simon Stevens, NHS England chief executive, for adult social care to be protected from funding cuts (though not at the expense of the NHS), and he appears to be a little more influential than most in terms of spending review decision making.
• David Cameron has made children in care a priority so slashing the financial basis on which services for children in care rests would seem to run counter to this.
• The government did provisionally plan to spend additional money each year (£0.7bn in 2016- 17 rising to £1.2bn in 2019-20) implementing the funding reforms to adult social care in the Care Act. This has now been delayed until 2020 leading local government and charity leaders too argue that this money is still available to spend on adult social care.

However, probably more significant is the fact that government has not made social care (for adults or children) a protected area, unlike the NHS, defence, overseas aid and schools. The money earmarked for the Care Act funding reforms has not been budgeted for let alone guaranteed for social care. So it seems too much to hope for that government will reserve this for social care. It is more likely that cuts – and not growth – will be the story for local authorities for the next four years – at significant cost to social care service users.