The Comprehensive Spending Review (delayed since the summer) and the Pre-Budget Report was published on Tuesday. Although a tough settlement was wiedly anticipated, it will make a disappointing read for many. The Local Government Association has branded the CSR as the ‘worst settlement for a decade’.

The Chancellor reported that although the UK economy has grown strongly at 3.25% this year the growth forecast going forward has been reduced from a suggested "2.5 to 3%" in the March budget to "2 to 2.5%" for next year. The Treasury blamed the recent turbulence in global financial markets.

As a consequence borrowing will rise steeply this year and is expected to continue rising until 2012. The government expects to meet a considerable proprotion of the shortfall through efficiency gains in the public sector.

Spending growth will halve over the next three years - to an average of 2.1 per cent per annum in real terms. Over the next five years, spending will be cut as a share of national income by the equivalent of £7 billion.

The settlement for local government is worth £26 billion by 2010 with a one per cent growth on top of inflation and the government has stressed that it does expect local authorities to hold council tax increases to substantially below 5 per cent.

In addition local authorities have to meet stringent new targets for a variety of services including increasing the rate of waste recycling to 40 per cent by 2010 and improved services for children in care, families in need and old and vulnerable people.

Funds allocated to the nine Regional Development Agencies in the UK will fall over the next three years, from £2.2 million in 2008 to £2.1million in 2010 with increased efficiency savings being expected to make up some of the reduction.

The most significant change for economic development is contained in a White Paper published on the same day as the pre-budget report setting out proposals for local authorities to levy a supplementary business rate to support economic development (see earlier stories in knowledgebase). There will also be changes to the Local Authority Business Growth Incentive scheme (LABGI) with the suggestion that it will be targeted more specifically at economic development. Currently there are no limits to the use of LABGI funds and many local authorities have used them to plug holes in their council tax receipts (see earlier stories in knowledgebase)

The CSR confirmed the spending figures and the targets for new housing that were outlined in the recent Housing Green Paper (open for consultation until 15th October). £4 billion will be spent over the review period on renovating homes and bringing empty residential properties back into use.

The government used CSR07 to announce that they were dropping the plan to introduce a planning gain supplement, after months of controversy. They are now proposing to set up a ‘roof tax system’ which will be a planning charge to enable councils to levy a charge proportionate to the size and scale of a development in addition to limited section 106 agreements.

Many commentators were taken by surprise with the announcement that the NHS will receive a 4% per annum increase from £90 billion in 2007/08 to £110 billion in 2010/11, which is much higher than expected but much less than the 7% of recent years. Given that the author of the Wanless Report recently warned that the NHS would require increases of at least 4.2 per cent just to stand still this may be insufficient to meet the expectations of the public.

Funds for adult social care, already struggling to cope with the demands of an ageing population, will increase by only 1% per annum which may require many local authorities to raise their eligibility thresholds ever higher in order to ration care to the most vulnerable

Economic Partnership Comment

It is clear that, after seven years of feast, we are now looking at the famine and many local authorities will struggle to meet cuts in budgets and increases in efficiency.

It is difficult to see how councils will meet new burdens placed upon them with very little additional cash and the target for 3% cash efficiency savings possibly leading to fewer staff to cope. Trade Unions will be furious that wages will be pegged at 2% for three years and there will inevitably be industrial action making a “winter of discontent” very likely.

The introduction of supplementary business rates presents opportunities to raise additional funds but with an exemption for businesses with rateable values of less than £50,000 this is extremely limited in a city like Brighton & Hove where the vast majority of businesses - probably as much as 70% -  would be excluded from the scheme.

Meanwhile big business, which had hoped for measures to boost the UK as a destination for inward investment from multi-national companies, condemned the budget as a non-event. Many are also unimpressed with the proposals for supplementary business rates but there is little to seriously worry big businesses.

Small business expressed bitter disappointment at the scrapping of taper relief on capital gains tax and its replacement with a flat rate of 18%. Many small businesses, built up over decades, took advantage of the taper relief with a final tax rate reduced from 40% to just 10% to reduce their capital gains when they sold the business. Accountants Baker Tilly are predicting a flood of sales before 6th April 2008 to avoid the new tax rate.

On the positive side the increase to over £6bn per annum to support knowledge transfer between universities and companies and nearly an extra £1bn for medical research will encourage competitiveness and innovation.