England & Wales Democracy, devolution and governance, Finance

Local government finance system is not fit for purpose


Photo Credit: Images_of_Money via Compfight cc

Councils sent a pretty clear message in their responses to this year’s LGiU and MJ local government finance survey. The local government finance system is bucking under the strain. If we carry on with the current system, something will crash. Greater fiscal devolution, however, could provide opportunities for local authorities to become financially sustainable.

A staggering 93% of respondents think that the current local government finance system is not fit for purpose. Whitehall’s domination during a period of austerity is creating some pretty severe concerns for finance officials and leaders. Indeed, 54% of survey respondents believe that their council is in danger of failing to fund statutory services in the coming years. Social services, education and civil protection are all under threat, not to mention non-mandatory services like car parks, arts and economic development drives.

Many authorities will be forced to charge their residents more money in order to make ends meet. Almost half of our sample plan to increase council tax above the Government’s 1% deal in 2015. But council tax hikes alone won’t cover costs. 82% of local authorities will generate up to 10% of their budgets from increased service charges. More and more residents will find themselves paying for things like public conveniences, green waste collection and council-led sports.

But it’s not all doom and gloom. Respondents were optimistic that we can fix the finance system. Most agreed that various forms of fiscal devolution could lead to financial sustainability for councils. By far the most popular method of fiscal devolution was to increase local authorities’ retention of business rates, with 77% of respondents expressing support for the idea. These views are already heaving practical implications. The Royal Borough of Kingston-upon-Thames has recently announced its flagship intentions to become an independent authority. Kingston largely intends to achieve independence through increasing its retention of business rates.

While business rates are popular, other ideas for devolution have also received a warm reception. We mustn’t assume that increasing councils’ ability to retain business rates is the simple catch all solution to local authorities’ financial issues. We have long known that there are problems with the way the UK’s funds are distributed. Indeed, a huge 94% of surveyed councils want to see the infamous Barnett formula scrapped. Funding our localities isn’t about parceling money or new schemes out from the centre. Each local authority needs the opportunity to work out the best way of managing its own finances, whether that be through tourism taxes, unringfencing the Housing Revenue Account or creating single local budgets.

Fiscal devolution may sound complicated, but it’s the only remedy for our crumbling local government finance system.

The LGiU and MJ’s 2015 local government finance survey showed that the local government finance system is buckling. However, our respondents agreed that greater fiscal devolution to councils can provide a viable solution. We’ve summarised the results in a handy infographic.