England & Wales, Global Democracy, devolution and governance, Finance

Local government innovation constrained by funding system


Photo by Jason Leung on Unsplash

Andrew Walker, LGIU’s Head of Research the one of the Local Democracy Research Centre’s projects undertaken with Kevin Muldoon-Smith at the University of Northumberland and Mark Sandford at the House of Commons Library. This project compares funding in England to three other systems internationally

Innovation in local government is constrained by its funding system.

Those, like LGIU, who have long argued for devolution to local government, have tended to see the structures of governance and finance as separate but connected components that can be altered to boost local autonomy. But this overlooks the extent to which funding and regulation underpins the local government system as a whole. Shaping the context that public managers work in, the spaces within which they can make decisions, and the driving of certain behaviours in local government.

Councils in England are backed into a corner by the limited funding that Westminster makes available to them, by the way that funding is delivered and by the regulation that restricts how it can be used. Even councils with additional powers and responsibilities delegated through devolution deals can have their hands tied by the fiscal framework they operate in. This situation has been magnified by additional financial pressures caused by Covid-19, the general impact of inflation in the economy and rapidly escalating energy costs. One of the few options open to them is the expansion of property portfolios, which some councils have pursued with gusto. This high-risk strategy has led to some disastrous results. However, the context that pressures councils to adopt this behaviour in the first place often left out of academic and journalistic criticisms of ‘financialisation’ and related market speculation

A new research project will bring a fresh perspective to this debate, by looking in detail at the system for funding and financing of local government in other countries. The Local Democracy Research Centre is working with the Kevin Muldoon-Smith at the University of Northumberland and Mark Sandford at the House of Commons Library to examine three international local government contexts – Italy, Germany, and Japan, to better understand how local governments are funded and financed in non-anglophone contexts. This is to move beyond the echo chamber of debate that can be dominated by Anglophone locations and associated systems of working.

The focus of the research is a whole-system understanding of local government finance in each country. Previous comparative work on local government funding examines small elements of the system, such as the array of functions available to local authorities, delivery of individual functions, efficiency metrics, taxation powers, borrowing powers, or local government size.  We are interested in building up a clear picture of the system as a whole, teasing out the implications for local autonomy and the scope for innovation.

Using a mixed methodology, the project will progress through several stages and outputs:

First, we will produce a comprehensive analysis of local government funding contexts in each case study country. This will include basic information on the structures in the three case study countries, the governance and constitutional context, as well as key statistics on: local authority functions, income, and expenditure; how much revenue is collected locally, and who collects it; the purpose and size of transfer grants; how much spending is ring-fenced and other limits on local discretion.

Interviews with policy makers, experts and officials within local government in each country will drive the second stage of the research. These conversations will tell us how the system actually works in practice. Key questions will include: how does the funding structure influence which functions local authorities prioritise?; how does legislation, regulation and central priorities influence local decision-making?; do central governments incentivise or discourage particular behaviours?; is there a perceived or real link between local taxation and the level of local services?; and are local taxes hypothecated to specific local services?

Finally, findings from these interviews will be situated within the context of recent political, policy and legislative changes. The data from each stage will be drawn together to create a picture of the decision space available to local authorities in each state, and which elements of the local government ecosystem that decision space depends upon.

This will enable the research to draw out lessons from the case study systems for introducing changes to the local authority finance system in England. This would assess potential system-wide effects in the English local government finance system, based on practice within the case studies, of changes to grants; local tax-raising powers; changes to functions; changes to capital finance; and changes to central-local relations.

Find out more about the Local Democracy Research Centre or get in touch with Andrew to get involved.



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