UK Local Government
Funding By Formula

Local government accounts for about 25% of UK public spending. A large proportion of this is funded through the central government 'Block Grant', allocated on the basis of a complex formula which determines each authority's Grant Related Expenditure (GRE) level. This formula is designed to assess the basic expenditure needs of local authorities, by combining estimates of the 'unit costs' of the services for which each authority is responsible with estimates of the level of provision required for each service. At a lunchtime meeting on 28 May, Research Fellow John Hobcraft argued that the GRE formula was based on inaccurate and outdated demographic data, failed to capture many important indicators of social need, and therefore did not allocate the Block Grant equitably. The GRE formula and the unit costs attributed to each local authority service had also been changed very frequently: this had led to surprising disparities in GRE allocations both across local authorities and from one year to the next for the same authority. Hobcraft also claimed that the Resources Allocation Working Party (RAWP) procedures used to allocate funds to Regional Health Authorities failed to reflect the overall need for health care in these regions.

John Hobcraft is Professor of Population Studies at the London School of Economics, President-Elect of the British Society for Population Studies (BSPS) and a Research Fellow in CEPR's Human Resources since 1900 programme. He has published widely on the demography of the United Kingdom and the developing world. Hobcraft spoke at the last of a series of lunchtime talks held by CEPR and the BSPS on 'Research on British Population: Findings for Policy-Making'. The opinions expressed by Professor Hobcraft were his own, however, and not those of the BSPS or of CEPR, which takes no institutional policy positions.

Central government estimates of GRE vary widely, Hobcraft noted, from £359 per head per year for Surrey to £717 for the London Borough of Islington. How equitable were these estimates? Hobcraft presented some illustrations which suggested that the GRE formula failed to capture many key indicators of need. London boroughs gained considerably from the heavy weights attached to population density, housing characteristics (based on Census data) and ethnic minority populations. Scant weight is given to indices of economic deprivation in the GRE calculations. Thus the Merseyside borough of Knowsley, for example, was assessed at a GRE of £518 per head, and the London Borough of Hackney at £679, even though Knowsley scored significantly higher than Hackney on important indicators of disadvantage such as the proportion of the population on unemployment benefit and the proportion of school-age children in families receiving supplementary benefit. Fox and Murphy, among others, have also shown that tenure in local authority housing is strongly and independently associated with many forms of deprivation, yet the proportion of residents in local authority tenure is nowhere incorporated in the GRE formula.
It is also important for allocation procedures to provide stability, so that authorities can plan effectively. Much turbulence had been introduced into local authority finance, according to Hobcraft, by frequent changes in the grant allocation system, including 'clawbacks', targets and 'rate- capping'. In addition, the unit costs which the government uses to assess need have been subject to frequent alteration. Hobcraft presented data for the financial years 1982/3-1985/6 which showed remarkable disparities in unit cost assessments, affecting every class of authority. Non-metropolitan districts as a whole suffered a cut in money terms from 1983/4 to 1984/5, while metropolitan districts experienced extreme variations in allocations from one year to the next. Hobcraft claimed that part of the instability was due to direct interference, as political fashions dictated whether inner cities or shires should be given priority.

The National Health Service also relies almost entirely for its budget on central government (about £9 billion for England alone in 1985/6), allocated according to the RAWP formula. This is based, first, on the region's total population and its composition by age, sex and marital status; and second, on an adjustment intended to represent regional differentials in need. This adjustment, based on Standardized Mortality Ratios (SMRs), has generated considerable debate. Its basic assumption is that regional differentials in mortality correctly reflect more general differences in health (or morbidity). Yet data presented by Hobcraft, drawn from the original RAWP report, showed that this was not so. The allocation per head for Wales, for example, is only slightly above average, yet Wales has a rate of male incapacity far worse than any other region and the second highest incidence of chronic and acute illness.

Hobcraft then discussed the general problems involved in assessing local need. The timeliness of data is a major problem in the GRE formula, he argued. Detailed data on population structure is derived from outdated sources, such as the 1981 Census, which will be 12 years old before new results are available. Comparisons of the actual results from the 1981 Census with estimates for 1981 based on the 1971 returns showed that the average error in estimates of age structure within districts was about 5%. As another example, estimates of the numbers of people aged over 65, living alone and having mobility problems were the largest component in the formula for personal social service provision. Yet these estimates were based on data from the 1977/9 National Dwelling and Housing Survey.

The accuracy of indicators is also very important. The 1981 Census was estimated to have undercounted the population of England and Wales by about 0.5% (around 200,000 people) and that of Inner London by about 2.5%. Although the population estimates in the GRE formula include a rough adjustment for the general undercount, the formula takes no account of the more severe undercounting of single-parent families and households in privately rented accommodation. As another example, a regression formula used to share out £75 million per year for personal social services for children aged under 5 is based on a 1974 survey which included only 75 children identified as 'at risk'.

Hobcraft argued that many of the difficulties involved in the collection and treatment of data would be eased if the government were to institute a continuing 'resource allocation' survey, with a sample of perhaps 2-10% of the population each year. This would provide more timely and accurate estimates and might eventually replace the Decennial Census. It might require an annual expenditure of £3-10 million per annum (compared with over £40m for the 1981 Census). This would be money well spent, Hobcraft argued, if it improved the allocation of over £20 billion each year.