Q&A: Tony Kirkham is the director of resources and section 151 officer at Newcastle City Council, and president of the Society of Municipal Treasurers. He spoke to Room 151’s Ian McDiarmid.
Room 151: This year we have the Spending Review, the Fair Funding Review, the Social Care Green Paper, and a consultation on business rates. Until we get more information there is a lack of transparency for local authorities on the state of their finances after April 2020. How damaging do you think that’s been?
Tony Kirkham: Well, obviously, it makes medium-term financial planning very difficult. It doesn’t make it impossible. I have to come up with a set of assumptions and test them and see if that puts us in a place where we think we can come up with a strategy, because you can’t just say: “Well, there are too many unknowns, therefore we won’t look to the future”.
Room 151: Do you think that the uncertainty will have led to cutbacks being made that later on might prove to have been unnecessary?
TK: It’s difficult to say, but in the late autumn we had a lot of talk about austerity being over, and I don’t think most people looking at the various different figures that have come out since then actually believe that is a reality. So, I do think local government in particular is likely to have less resource going forward, it’s just trying to estimate the size and scale of the reduction. I think where authorities are looking at how they re-provision services on a smaller cost base, then I think they are probably doing the right thing. It may be that there is more time to transition to that if you’ve got a situation where there is more resource in the system than anticipated. But I don’t think anybody is really thinking that we are going to get to the point where there is appropriate growth within the system for the demands that are out there.
Room 151: So, looking ahead to the Spending Review and Fair Funding Review, you’re essentially looking for more of the same, are you?
TK: I’m not looking for that! I hope that the Spending Review will start to reflect the role that local government plays in society and the fact that we’ve taken the brunt of the cuts over austerity. I think the government should be able to see now the impact that that’s having on the whole system. So, some of the things which we were doing, which are non-statutory, which are in the preventative arena, we have had to cut back. Now, in the long-term for the country, I don’t think that is in anybody’s best interests. I think the question is whether the Spending Review starts to pick up on that.
You mentioned the Green Paper earlier. I would have thought that if it is going to result in the sort of changes that we’re hoping for, it will recognise the end-to-end nature of the system and that it’s not just the health aspects that meet people’s need. The social care piece and the piece where you are working with individuals who are still in the community, are just as important in looking at the whole system and I hope the Green Paper and the Spending Review start to reflect some of that.
I’m expecting the Spending Review to probably only cover one year, which again is going to be fraught with difficulties.
Room 151: You’ve been talking about expectations. When you were talking at the Room 151 FD Summit in October, you said that in the context of the sector delivering huge cuts since 2010 that you would hope that the government would be listening to the sector. Is there any sign of central government getting the message?
I think the one-off bits of support which we’ve had over the last couple of years show some level of recognition, and have helped us take some of the rougher edges off and given us a little bit more capacity to deal with the day-to-day. But we can’t keep doing that. We do need to get back into investing in the right preventative agenda and having some sense that we can work with people over the longer term, because some of these interventions are not the sort of thing which are going to change families overnight. Families who are on the edge will need support for a significant time and you cannot pay for that with one-off money forever.
The Fair Funding Review, whatever it decides, is going to produce winners and losers. Are you worried that some of the losers in the redistribution that is going to occur will be pushed into issuing Section 114 notices this coming year?
I don’t think it will be this coming year, and if we do get to that stage I would hope the government are wholly aware of the level of volatility that something like this could produce. I anticipate that they’ll have quite robust transitional arrangements in place because by the time we get a sense of what the changes are going to be for April 2020, we won’t have any planning in place to actually respond to that.
So, in first year of it, I think the government are going to have to dull it down so much that actually it looks very similar to the 19/20 distribution. I hope, though, that we will have won some of the argument in relation to quantum. So, if this is just a matter of redistribution, and there are winners and losers, and there is no increase in quantum, then yes, there are going to be a number of authorities in some real difficulties if the money moves more to a population than a needs basis. But I would have hoped that the government will have got the issue in relation to quantum and, therefore, in considering their transitional arrangements, they would be looking at how they fund that.
When they do exercises like this in health, though I know it’s a bit different, they do tend to bring in new money. It would be nice to think that we were talking about new money coming into the system and how that is distributed to deliver a fair outcome, rather than looking at how you distribute cuts to the system. I know the government has basically said on a number of occasions that this all needs to be fiscally neutral, but I think they need to think about fiscally neutral in terms across not only local government, but across all of the services.
Again, I think that some of the lack of prevention that we’ve got in the system means that things aren’t actually fiscally neutral. They are moving costs around the system, and things like Universal Credit, where the intention was to reduce the quantum nationally, I think if someone did proper research on it they would be able to demonstrate that it’s not actually saving the country any money. If anything, it might be costing us more further down the line as people get into much more difficulty and we have to work with them to avoid things like homelessness. Previously, the system gave us a lot more opportunity to do that.
So, if I’m being optimistic, I would hope that the quantum would increase, that the transitional arrangements would be sensible in relation to planning, and that the government then would be working with those areas which are having significant impact. Remember this is not only a cash situation for local authorities, because most of our problems these days are being driven by the fact that there is increased demand in the system.
If you take something like the increases in the National Living Wage, which nobody would disagree with, particularly in relation to the social care sector, those increases are really quite material. So, for Newcastle over a three-year period that alone will increase our social care bill by £16 million. And hopefully the Green Paper, if it does start to deliver the sort of the things we’d hope for, would look into the sustainability of that market. You’ve got a situation where people in social care are looking at the opportunities of working in Tesco’s on a similar sort of rate. Social care is a much more of a gruelling commitment, although obviously very rewarding when it’s done right. If you think about the need within that market, then those costs are justified, but that the same time they need to be funded.
You made a reference to deprivation and also you were talking about redistribution. The Foundation Formula we have been told is going to be using population as its main yard-stick and will not be using deprivation. Do you anticipate, in the light of that, there is going to be shift of funding away from urban areas like yours to county councils.
I think if the ministry goes through with that, then yes. The Foundation Formula is probably going to be around 30% of the local government need and to suggest, when you look at the factors in there, that it will not be driven by deprivation I find very difficult to comprehend. The LGA has come out very strongly, and with a uniform voice, saying that they don’t believe that the foundation formula should be population-based. I think that’s a real positive and I hope that the ministry have the opportunity to reflect on that and think it through.
The evidence which they have used, saying that only 4% of it is affected by deprivation, I think is in part because those areas with greatest deprivation have been those areas which have had the greatest grant reduction over the years.
You are looking at a pool of services covered by the Foundation Formula which are less statutory in nature, which means surprise, surprise, that when we’ve been taking money out of the system, we’ve been taking it out of there rather than taking it out of the social care side. So, what you’re seeing is a profile of spending that’s not addressing the needs that are actually in the system.
Again, it goes back to an argument about prevention. The need is there. The money is not there to meet that need and in the short term, and the medium term we’ve had to cut back on those services. I think overall the national bill will start to increase if we don’t put that back in.
You don’t sound optimistic, but you sound as though you have some kind of faith in the system. The county councils are good at lobbying and there is a conspiracy theory that because the county councils are largely Conservative that they have the ear of the government. Are you not bothered by those concerns?
I think as professionals, we need to try and look at this in relation to the fairness of the overall system. I think we need to put our personal positions to one side. This isn’t about Tony Kirkham who currently operates in Newcastle City Council thinking about it through that particular lens. It should be about us collectively thinking what’s the right thing to do.
But, yes I absolutely recognise that if you look at the debate about negative revenue support grant, the rural grant, and you look at the list of organisations which have gained from those things, they tend to be the counties under Conservative control at the moment. So, there are definitely indications that the government has supported those areas and has listened to the concerns which they’ve put forward.
Now, within this system I think we can all collectively say that the quantum is wrong and hope that we continue to put that forward through the LGA. I have concerns, yes, that the county lobby is very professional in its ways and is well resourced and therefore does tend to get its point over. However, if you look at the points that they are making on social care, children services etc. then they are the same points that cities like Newcastle are raising, even if they are even more difficult areas of concern for us. So, in a sense we can piggyback on the back of some of the issues that they raise.
The distribution is still a problem though. If you say deprivation doesn’t impact homelessness, deprivation doesn’t impact benefit claims, deprivation doesn’t impact concessionary fares, then I think you’re not being honest in your analysis.
One of the big Government policies is to gradually substitute the revenue support grant with business rates retention, and you, as part of the North of Tyne Combined Authority, are running a 75% pilot. Is this a good idea? Do you welcome the flexibility that it brings to you?
That is a 19/20 pilot, and it made sense for the three authorities to come together given the creation of the fourth authority in relation to North of Tyne and for us to see how we could work together. Most of areas that the North of Tyne is focusing on are in relation to economic development, and growth is a significant interest in that.
In relation to growth, I disagree with the idea that if local authorities put in the same effort then we will all get the same results coming out of the other side. In some areas the growth is there, the private sector can see the opportunities and the returns, and they are only interested in a local authority from a planning perspective.
In areas like the North East we have to put in more work with partners to get a smaller level of growth over the line. So, when you come to schemes which reward growth, and I know it’s not an easy thing to do, you need to think about the effort that’s put in to get to that growth, when you look at how you reward local authorities.
If you look across into the new homes bonus territory, which is an initiative which is supposedly driving growth, most of the analysis that’s looked at that has basically said: “Well, it hasn’t actually changed anything.” It’s just another way of distributing the money. From a local authority point-of-view in Newcastle, that distribution has actually gone against us because we would have to way out-perform our possibilities in relation to new homes, in order just to stand still, because that money is top-sliced off from a grant which is basically needs-based.
I think in looking at the infrastructure of how you reward growth, you need to understand how people have put the effort in to get that growth and how difficult it is. From a North of Tyne point-of-view it makes good sense for us to be looking at that collectively and trying to drive that growth up together and taking that responsibility. So, if the growth actually falls in Newcastle or the growth actually falls in North Tyneside, because it is a combined pot that doesn’t make as much difference to the result for us.
You have said that this system is not going to reward effort, it’s going to reward the actual expansion of business rates. Doesn’t that mean that it’s going to favour unfairly the areas that you were alluding to, that really don’t have to put in a great deal of effort such as the South East and London?
The Ministry needs to look at how often you reset, how you reward councils, and what is the levy on overall growth. There are ways of bringing some of that back into the calculations in the sense of place. I think that is a piece of work which they are going to have to look at carefully. Growth in itself isn’t without costs and those authorises who are experiencing that growth will have additional costs which they do need to meet.
It’s a question of how much of that expansion they should be able to retain and over what period and how does that fit back into the bigger factor of relative needs. But certainly in the short term to medium term, if the government do want to redress the balance of growth across the country, then they need to think about the tools that they give us in order to support that and the investment that needs to be put into say the core cities which have been on this agenda for quite some time.
If you look at the comparators across Europe, how do you invest to get that growth, to get the national benefit, whereas in the South East it’s a different type of situation isn’t it? It’s about how do you stop overheating. Consequently, the system becomes an ineffective way of delivering growth. I do think that this is a complicated issue that needs to be thought through.
The big picture behind business rates retention is the government looking to replace the revenue support grant with an alternative source of funding for local authorities. Does it worry you that this move towards business rates retention makes an important source of future funding for local authorities dependent on the performance of the high street at a time when the high street is in decline?
It’s certainly creating risks in the sense that there have been quite a number of shocks to the system.
I think the issue about the high street is how do we reposition it. How do people go for a different experience than just shopping? Therefore, it could be something that could still have a very fruitful, long-term, sustainable future, but it does need to go through a transitional period to get there and will need quite significant thought. Nationally, the government need to decide what level of burden retail should have to bear in relation to its business rates, and whether that is actually appropriate in relation to driving forward that part of the economy.
The Centre for Cities’ “Cities Outlook 2019” said that Newcastle had seen a 26.6% fall in total spending from 2009/2010 to 2017/2018 compared with an average for Great Britain of 14.3%. Do you think that Newcastle has been treated unfairly?
In simple terms, yes. As part of the austerity measures, authorities like Newcastle have taken the brunt. We were, and are more grant-dependant, because of the nature of the demands we have. If you look at the demands on a city like Newcastle then they are significantly higher than, say, Wokingham, which we often use as comparison to get this point over. We have seen significant reductions in grant support, compared to the likes of Wokingham but our needs are significantly higher, and that’s the point of a fair funding review. It should take into account the needs and the demands placed on the council, not look at the quantum per se.
What is Newcastle doing in terms of commercial property investment at the moment?
Like a lot of authorities, we’ve got quite a significant property holding land base which we’ve had pretty much since we were a council
What we have got, under the city deal, is three EDZs which cover quite a significant part of our growth potential, which we are working with partners on in order to develop. We can afford to invest in those areas because of the business rates yield that will come to us in the future. We retain that 100% growth for 25 years. So, we’ve made some real great progress on our Helix site with Newcastle University and L&G as partners, which should by the end of the year have a new grade A office available, which has seen a lot of interest. It means taking on some financial risks because the market isn’t ready to spec build on grade A in Newcastle yet, but we think we are on the tipping point where that will start to come through.
We just opened a lab building this year which will support the scientific small and medium enterprises coming through. So, we’ve got a number of activities, particularly in those EDZs. A couple of years back we supported the development of a hotel.
We also own a significant interest, as the land owner, in Eldon Square Shopping Centre, which we have had for quite some time. So, obviously, we are acutely aware of the problems facing the high street, as we were talking about earlier, and are thinking about how you reimagine that offer.
Newcastle’s investment is very much based on the local economy and its needs and supporting development and job creation. We also did quite a bit of work with the third sector, as we had to reduce the grant support in the system, to look at how we supported some of the more commercial aspects. So, if you look at something like Live Theatre, which is a really successful theatre down on the Quayside in Newcastle, we supported them in the development of an office block, which provides an income to support their arts facilities. We have looked at that quite creatively and worked with partners and looked at the individual opportunities. What we don’t have is significant investments in buildings and commercial opportunities outside the boundaries of Newcastle.
Can you give me a rough idea of the size of your commercial property investments?
I suppose it depends on what sort of period you are talking about. How much we have invested in the last few years? We are talking in the tens of millions. So, I’m sitting here in the Civic Centre at the moment, which is made up of lovely buildings which were developed in the sixties and which we are now spending some £30 odd million repurposing. We are leasing floors of the main building and we are incorporating the family courts into the sector, so it’s developing the civic purpose of this area. As part of that, not only will we have upgraded the building which will allow our staff to work in a more agile, more energy-efficient way, we will also be reducing our overall costs and developing a rental stream which will more than pay back the borrowing. So, we are looking at £1-1.5 million of ongoing revenue savings as a result of that development, but that has taken a £30 million investment.
Looking outside Newcastle at the sector, are you worried by the spending of some councils on commercial property investments, the ones that have gone for it in a particularly big way?
I am sure colleagues who are in that space have thought it through, what it means for them as an authority and looked at the individual business cases and without the opportunity to go through that, it’s difficult to know whether it’s a good investment or a higher-risk investment. I think local authorities, over the austerity period have had to take a different position in relation to risk. I think we were relatively risk averse 10 years ago compared to where we are now, and I think austerity has driven that, as we have had to cut back on services and opportunities. So, I am sure colleagues who were looking at these individual business cases and thinking about how that met the risk appetite of their organisation will have thought that through and they will have appropriate mitigation in place if they end up nearer the bottom of their sensitivity analysis rather than at the top end.
