England & Wales Finance

Perspectives on local government funding

Summary

  • This briefing looks at recent developments in the debate around local government funding, focussing particularly on two recent reports: the joint PriceWaterhouseCooper (PwC)/County Councils Network (CCN) Independent review of local government spending need and funding and the Institute for Fiscal Studies (IFS) briefing English council funding: what’s happened and what’s next? that were both published towards the end of May 2019.
  • The PwC/CCN review analyses how local government spending patterns would have changed if all councils had spent their resources in line with their spending needs, and concludes that by 2015/16 there was already an underlying funding gap of £1 billion for CCN councils. It calculates that spending needs for local government as a whole will increase by 35 per cent between 2015/16 and 2024/25, and estimates that there could be a headline-grabbing cumulative funding gap of £51.8 billion by 2024/25 – but that excludes the effect of council tax increases and any business rates growth above the baseline.
  • The IFS briefing notes that local government spending has reduced by 21% since 2009/10, but that reduction has not been spread evenly – cuts have been deeper in more deprived areas. The briefing warns that future costs and demands are likely to outpace planned funding and business rates revenues and council tax “seem highly unlikely to grow fast enough to meet rising costs and demands”. It suggests that local income taxes might be one way forward, but calls for a national debate on the future role of local councils, particularly on the relative importance of incentivising growth and maintaining common standards.

Briefing in full

The County Councils Network Review

The County Councils Network commissioned PwC to undertake an independent review of local government spending need and funding in September 2018. The review was designed to analyse the financial challenges that county councils and county unitary authorities in England have experienced and are likely to face over the period 2015-2025. The review also explored some different strategies to meet those challenges.

The review recognises that financial pressures will impact upon different councils in different ways depending on the services they provide, the characteristics of their residents and the geography of their areas. The review takes a slightly different approach to other studies that have, in the main, focussed on how funding and service expenditure have reduced since austerity began in 2010. Instead, PwC have sought to estimate changes in spending need “based on a more consistent level and quality of service provision”. To do this they started by establishing 2015/16 as their baseline year and assumed that total spending in that year closely reflected underlying spending need. It is not entirely clear why they chose 2015/16 as their base year and the methodology they have used to arrive at their “more consistent level and quality of service provision” seems quite complex. Very briefly, it involves identifying the unit costs of delivering different elements of services for each tier of local government, then adjusting using area cost adjustments to determine whether different types of authority spent more or less than what they call authorities’ “notional spending need”.

Whilst the methodology may be not totally clear, the results are interesting and provide a fresh perspective on the debate.  PwC claim that spending needs for county unitaries, district councils and metropolitan districts in 2015/16 were higher than actual spending by 12 per cent, 64 per cent and 1 per cent respectively. In contrast, spending needs for London boroughs, non-CCN unitaries and county councils were less than actual spending by 15 per cent, 2 per cent and 1 per cent respectively, the implication being that those authorities are spending more because of historic funding levels and/or political choices over the level of service they provide.

Having established a baseline, the review goes on to estimate that local authority spending need will increase by 35 per cent (£15.7 billion) between 2015/16 and 2024/25, with London boroughs experiencing the largest increase, around 40 per cent, and district councils the least, around 24 per cent. Analysis by service suggests that children’s social care will experience the largest percentage increase in spending need over the period, 48 per cent, followed by adult social care, 43 per cent, environmental and regulatory services, 28 per cent, and education services 27 per cent. Remaining services will see increases of between 23 and 25 per cent.

The review then goes on to examine how funding is likely to change in the period 2024/25, with and without increases to council tax. By recalculating spending need on “a more consistent level” the review claims that in 2015/16 there was already an underlying funding gap of over £1 billion for CCN authorities that was balanced by an underlying surplus for London boroughs and metropolitan districts. Going forward, the review looks at two scenarios: with and without council tax rises, but both appear to exclude the effect of business rates growth. The “£51.8 billion black hole” for council funding that attracted so many headlines, appears to be the cumulative effect from 2019/20 to 2024/25 assuming no business rates growth above the baseline and no increases in council tax. With annual council tax increases of 2.99 per cent the headline figure is a still frightening £35 billion over the same period. The review argues that reductions through increases in fees and charges and use of reserves could reduce this further, but only marginally, but the lack of discussion on the potential effect of business rates growth is surprising.

The review concludes that:

  • The current local government funding model does not reflect underlying spending need
  • There are significant underlying demand and cost pressures for all tiers of local government
  • The scale of these pressures varies, but CCN authorities are the most exposed and are most limited in the options they face
  • Decisions on funding need to take account of relative spending needs and recognise variations in demand, cost of service delivery and the ability of councils to provide a consistent level and quality of service

 The IFS Briefing

The IFS briefing brings together some key findings from their recent research into local government funding. The review sees the current decade as a period of profound change for English local government. Not only have funding and spending fallen significantly – the latter by about a quarter per person but, by the end of the decade, the Fair Funding Review should be implemented with councils becoming far more dependent on local tax revenues and general-purpose grant funding abolished. The system will be more focussed on incentives to grow local tax bases with less emphasis on redistributing funding based on spending need.

The briefing notes that local government spending rose consistently during the 2000s increasing by 57 per cent in real terms between 2000-01 and 2009-10, but since 2009/10 it has fallen continually – by 21 per cent between 2009-10 and 2017-18. However, the cuts have not been spread evenly across the country: for the most deprived fifth of councils cuts have averaged 31 per cent, compared to 17 per cent for the least deprived fifth. This reflects the fact that cuts to funding from central government between 2010 and 2015 did not fully take account of the extent to which different councils relied on that funding. The way cuts were applied changed in 2016-17 which made the process more equal, but still did not fully reflect the fact that deprived areas can raise less from increasing council tax than affluent ones.

Councils have responded by making significant cuts to discretionary services whilst trying to protect acute and statutory services. Only children’s social services saw a real-terms increase in spending between 2009-10 and 2017-18; spending on all other services, even adult social care, fell over the period,  with four services: planning and development, housing services, cultural and leisure services and highways and transport seeing cuts of over 40 per cent. Even within children’s social care, spending on general services such as Sure Start has fallen by 60 per cent, whereas spending on acute services has increased. Within adult social care, the numbers receiving care has fallen, with support being focused on those with the highest care needs.

The briefing expresses concern that future costs and demands are likely to outpace planned funding, warning that, with the abolition of general-purpose grants, business rates revenues and council tax increases “seem highly unlikely to grow fast enough to meet rising costs and demands”. Even if future council taxes increases average 4.7 per cent a year (which would increase the average band D charge by £1,000 over 10 years), over 15 years the proportion of local tax revenues needed to meet projected demand for adult social care would rise to over 50 per cent, with corresponding cuts elsewhere. As that is not sustainable one of three things will need to happen:

  • Councils will need to relieved of responsibility for some services
  • Central government grant will have to be retained and increased over time, or
  • Councils will have to given access to alternative revenue streams.

If the last of these is to be pursued, the briefing argues that a local income tax would be the most sensible option. Of the alternatives, a tourist tax would only raise significant sums in a few well-visited areas and a £1 a night flat rate tax would only raise about £400 million across England. VAT and corporation tax are discounted because of the difficulties in apportioning them between areas, and Stamp Duty is discounted because of its inequality and volatility. The briefing recognises that local income taxes would not be without challenges; HMRC does not hold up-to-date address details for all taxpayers, and amounts raised would vary significantly between areas, so some sort of redistributive mechanism would be required to ensure fairness.

The last sections of the briefing consider the impact of the anticipated changes business rates retention and the outcome of the Fair Funding Review. The proportion of business rates retained locally is due to increase from 50 per cent to 75 per cent from next April, with a corresponding reduction in government grants. The aim is to provide stronger incentives for local economic growth, but there is a risk that will lead to councils with less robust business tax bases being left behind (see LGiU policy briefing: Business Rates Retention Reform Consultation, January 2019). The current proposals are to limit divergence by resetting the system periodically to redistribute business rates to account for changes in spending need, but consultation on the how this could be achieved is still awaited. Given this uncertainty, the briefing calls upon the government to publish empirical analysis on the potential effects of different policy choices before any final decisions on resets are taken.

The Fair Funding Review is running in parallel with the preparations for 75 per cent business rates retention and is designed to set new baseline funding allocations when the new percentage is applied next April, and to provide a mechanism to recalculate needs at periodic resets (See LGiU policy briefing The Fair Funding Review – One Year On). This is not proving to be an easy task.  Despite two rounds of government consultation, there are still many uncertainties about how it will function.

The IFS briefing highlights some of the key issues:

  • The assessment of council’s spending needs is not straightforward, and has to be inferred from historic spending patterns and subjective analysis of demographic, socio-economic and geographic data.
  • Data derived from analysis of small geographical areas is likely to be most helpful, and the IFS review supports the government’s approach in seeking to develop formulas for assessing spending need for the biggest spending service areas: adults’ and children’s social care.
  • Where small-area data is not available, caution will be needed to avoid determining need merely on the basis of historic spending patterns. IFS analysis suggests using different years would produce very different results, mainly because the more deprived areas have seen deeper cuts in funding and their spending relative to less deprived areas has fallen since austerity began in 2009/10.
  • In the December 2018 consultation, the government proposed that a significant part of spending needs should be assessed using a foundation formula based on population only. The government’s justification for this was that statistical analysis suggests that deprivation has little impact on historic spending patterns across services other than social care. The IFS questions this approach, drawing a distinction between actual spending and spending need. Their analysis suggests that a population-only foundation formula would lead to significantly lower assessments of spending need for deprived councils compared to their more affluent neighbours.

The briefing concludes that a proper national debate is needed on the following:

  • Are we are willing to raise taxes to meet rising costs and demands, or do we want to lower expectations on what councils can provide in order to keep taxes down?
  • Are we willing to accept more variation in service provision in exchange for more local control, or should redistribution, common standards and ring-fencing be central features of the reformed system?

Comment

Finding an acceptable way forward for local government funding is not proving to be an easy task. The Fair Funding Review began in February 2016, but progress has been slow and many important issues still need to be resolved. There is speculation that Brexit paralysis and the Conservative Party leadership campaign may force the 2019 Spending Review to be postponed which, presumably, would delay the reforms to local government funding at least another year.

With these doubts in mind, and the deepening crisis in adult social care highlighted in the BBC recent Panorama programmes, it is not surprising that the debate over the future of local government funding is opening up. The LGiU is taking a leading role in this through the Local Government Taskforce and has been running round-table events and on-line consultation ahead of a major new report due in July 2019. The MHCLG Select Committee is also currently gathering evidence as part of its Inquiry into Local Government Finance and the Spending Review 2019.

The two papers considered in this briefing provide valuable but contrasting perspectives. The CCN/PwC review attempts to estimate spending across different types of council, assuming a more consistent level of service provision. The analysis has been used to demonstrate that the cumulative funding gap for local government could reach frighteningly high levels by 2024/25, and that county councils and county unitaries would be the most exposed. Discussion on the impact of business rates growth is, however, not detailed and the choice of 2015/16 as the base year seems rather arbitrary – it is possible that the choice of a different base year could perhaps show that a different group of councils would be more exposed.

The IFS briefing brings together the main arguments and concerns about the proposed reforms in a short and very readable paper.  The analysis is no less shocking, demonstrating how more deprived councils have been hit hardest by austerity and how the government’s proposal to base the foundation formula on population alone appears to make things worse. In considering options to provide more funding, IFS are probably right to discount direct contributions from most national taxes, but the preference for local income taxes is a little surprising. If address data is not accurate and an equalisation mechanism would be necessary, why not just continue with general grants?

As we await the outcome of the Fair Funding Review and the proposals for reforming business rates retention, the choices remain difficult. The key question is: do we provide councils with greater incentives for growth and risk further divergence in service provision, or is maintaining common standards of service more important? The way that Whitehall chooses to resolve that dilemma will have a profound effect not just for the future of local government, but for society as a whole.

For more information about this, or any other LGiU member briefing, please contact Janet Sillett, Head of Briefings, on janet.sillett@lgiu.org