Innovation and Incentives

Author: Merrick Cockell - Oct 16, 2009

As one of the world’s leading financial centres, London has felt the impact of the global recession earlier and harder than many other parts of the country. However, for London’s local authorities, the recession has merely exacerbated an already challenging financial situation. Even before the recession, 24 boroughs were on the funding floor, receiving only the minimum grant increase. Now all boroughs face falling revenues and rising service expenditures and the prospect of major cuts in government grants in the coming years.

London Councils has long made the case that London needs to be effectively resourced. Investment in the capital’s services and infrastructure has a disproportionate impact

upon the success of the national economy and London is a significant net contributor to the Exchequer.

Unfortunately, the parlous state of the public finances puts a question mark over public spending. Earlier this year, the Learning and Skills Council withdrew financial support from

several higher education projects across London, with colleges’ funding axed at the last moment or even after existing buildings had been demolished. Meanwhile, according to ONS figures (April 2009) the national debt is expected to balloon from 53% of GDP to over 80% by the time the recession ends.

Higher debt servicing and falling tax revenues make spending cuts inevitable. In a recent and unprecedentedly candid, on-the-record interview, Sir Gus O’Donnell, the Cabinet

Secretary, described how the coming spending squeeze would hit the whole public sector and warned that some departments faced spending cuts of 20% or "deeper".

At the local level, the recession means boroughs are seeing falling council tax and rent collection rates, while historically-low interest rates have slashed investment returns. With reductions now expected in grant funding, not to mention increased cost-shunting from government departments and other public sector bodies, council budgets will be under significant pressure to deliver more for much less.

Enormous potential savings exist from bringing more public expenditure under local control: of £68bn in public funds spent in London in 2007/8, only £26bn went through local government. Yet, across the country, local government has consistently outperformed national government in making Gershon savings while driving up performance.

Driving the recent joint-appointment of Hammersmith & Fulham’s chief executive as chief executive of their Primary Care Trust is this need to find more cost savings and improve performance. With so many health and social care outcomes a part of a council’s Comprehensive Area Assessment, Whitehall must foster a greater realignment of central funding and services with local decision-making.

Similarly, several London boroughs established the London Authorities’ Mutual Limited – a mutual company to reduce their insurance costs – using the general well-being power. However, in June, the Appeal Courts ruled that their participation in the mutual was beyond their statutory powers.

The boroughs may have been mistaken but if their working together in a recession to save their residents money exceeds the well-being power’s limits, that power is meaningless. If expensive judicial reviews and protracted appeals threaten every collaborative venture, then boroughs will become risk averse – an extremely retrograde step when we want them to innovate to cut costs.

Clearly, London’s local government leadership is already thinking creatively how to meet ongoing funding and service challenges but government needs to support their innovation.

Merrick was writing for London Councils' new publication, 'Developing a manifesto for Londoners', please click here to view the entire publication