The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:
"The current system for distributing central Government funding to local bodies is complex and difficult to understand, and too often results in local public bodies getting the wrong amount of money, which is not fair to local communities.
£152 billion, one-fifth of all government spending, was allocated in 2011-12 in the form of three formula-based grants. This funding pays for health, education, local government, police and fire and rescue services. It is essential that this money is distributed fairly, consistently and transparently - but we found that this is not always the case.
There are a lot of things wrong with the formulae that have led to very unfair allocations which have failed to meet local needs. For example, the Dedicated Schools Grant is based not on current need but on historical spending patterns with the result that similar schools can vary in the amount of funding they receive per pupil by as much as 40%. Under the Formula Grant, the actual needs of local authorities are assessed but, because priority is given to stability of funding, 20% of the authorities receive funding that is more than 10% higher or lower than they need.
It cannot be right at a time of budget cuts that this results in Wokingham receiving double the funding it actually needs, while many other local authorities, such as Dorset County Council, get much less than they require.
Similarly, few people understand how DCLG distribute their grant between local authorities.
All of the approaches to formula funding we considered are under review. This is the perfect opportunity to address the weaknesses this Committee has identified and we will examine closely how those government departments respond."
Margaret Hodge was speaking as the committee published its 55th Report of this Session which, on the basis of evidence from the Treasury, the Department of Health, the Department for Education and the Department for Communities and Local Government, examined existing approaches to formula funding across government, and the principles that should be carried forward to new arrangements.
Government departments distributed £152 billion, one-fifth of all government spending, to local public bodies in 2011-12 based on the three grants we considered in our hearing: Primary Care Trust Allocations; Dedicated Schools Grant; and the Department for Communities and Local Government’s Formula Grant. These distribute funding to local public bodies in a range of sectors, including health, education, local government, police and fire and rescue services.
Formula funding systems
The formula funding systems are complex, difficult to understand, and have led to inequitable allocations. For Dedicated Schools Grant, based mainly on historical spending patterns, per pupil funding for schools with similar characteristics can vary by as much as 40%. Under Formula Grant, nearly 20% of authorities received allocations which are more than 10% different from calculated needs. These variations have arisen from multiple objectives for funding formulae, and in particular judgements on the rate of change of funding deemed reasonable.
The priorities accorded to different elements of the formulae are judgements which have a direct impact on the distribution of funds. In some cases the basis for the judgement is guided by authoritative, published independent advice. One example of this is the weighting the Department of Health applies to the health inequalities element of Primary Care Trust Allocations. In other cases, for example the weightings the Department for Communities and Local Government has applied to elements of Formula Grant, the basis for judgement lacks transparency, and external advice lacks status and influence. Only 4% of respondents to DCLG's consultation supported the current version of the model used to calculate Formula Grant.
Some of the data used by departments in calculating relative needs is inaccurate and out of date. For example, some of the indicators used to assess relative need are based on 2001 Census data, now ten years old. Although the 2011 census was recently completed, it may prove to be the last national census of its kind, and an alternative source of reliable data may need to be identified.
All of the approaches to formula funding the committee considered are under review. These reviews provide the perfect opportunity to address the weaknesses we have identified including building in greater transparency; ensuring greater consistency, leading to more equitable distributions; appropriate oversight and outside expertise; to share and improve upon sources of data; and to commit to moving funding between areas so that the right funding for an area's needs is achieved within a set time period.