England & Wales Communities and society, Finance

“Localising” funding and pooling goes to the core of local democracy

Current Government consultations to localise funding will affect every council and its relationships with residents and businesses – as set out in both the proposals for localisation of business rates and the local support schemes to replace council tax benefit.

A more unexpected aspect is how strongly these “localising” proposals encourage authorities to pool together, or with their LEP.  This is to be more effective and coherent in building growth, attracting business, sharing the large new financial risks and ensuring quality delivery and value for money. But it implicitly acknowledges that in other countries with localised resourcing, smaller authorities or those in poorer areas are struggling, going bankrupt and merging.

In England, how the tariffs and top-ups set the balance between equity and incentives for growth will mean some councils will become ‘free’ and enjoy a cycle of growth attracting business, jobs, residents and increased income from  business rates and council tax.  But for others, what goes down could go down even further.

The incentives and implications for authorities to pool some of their new independence and funding in return for sharing risk, growth – and securing their own basic viability will be a focus of the Centre for Public Service Partnerships and LGiU events in the autumn.

The business rates proposals imply there will be incentives for local authorities to pool their top-ups and tariffs and agree the local distribution of any levy.  LEPs are cited as an example of bodies that meet the criteria for joint working. This would go beyond their more obvious interest in considering proposals for Tax Increment Financing in a sub-regional partnership.

LEPs are business-led, and were not established to play a role in deciding the core funding between local authorities. This new mooted role for LEPs highlights the lack of a coherent definition of local government functions.  It raises issues of governance and accountability to the public.

Both sets of proposals expose, but do not consider, the scale of the local political challenge.  Sharing risks and rewards is as much political as a financial decision.  In future, increases in local government funding increases will be dependent on growth in the business rates, yet the big expenditure pressures are from demand for social care.   The fundamental political leadership role of local democratic bodies is to find a balance between competing communities of interest and geography.  Success is when those who are not winners still accept the outcome.

The big issue remains how to redistribute funding between individual tax and rate payers and the different services provided at national and local level.  This requires strong accountability and routes for the public to influence decisions on what is provided, who pays, who benefits from local services and who is exempt or eligible for discounts on local taxes, rates and charges.

For example, to grow business rates will mean new developments. Sometimes, they are opposed by individuals and communities who would lose amenity from them and may not feel they would benefit from them – or from the council’s increased spending on social care.   For political leaders, the financial incentives must be enough to cover the potential political costs of taking decisions in the wider good as specific angry communities react – especially given annual elections.

Pooling to share new financial risks is also within this week’s proposals on the replacement of council tax benefit, Localising support for council tax in England: Consultation.    In 2013 the CTB budget will be cut by 10% and distributed to authorities to allocate by local formulas.  The consultation makes a clear national guarantee of no change to current pensioner’s eligibility for council tax benefit. Therefore the local schemes will focus on how to distribute the reduction to non-working age claimants – and ensure future proposals support incentives to work and mesh with the new universal credit.  Given the requirement to reduce, and mitigate the effects of, child poverty in local areas, the inevitable outcome is a big reduction in support for single claimants.  In the design of new local schemes and their administration, the risks of increased take-up, low collection or fraud will be borne locally, not nationally, as now. Again, the government suggests the LEP partnerships may be the suitable means of coordinating approaches, particularly since they should link to promoting jobs and growth.

So, some important new roles are being suggested for LEPs, closer to being local funding commissions and brokers between local public bodies.  Is this sensible and what are the necessary democratic safeguards and practical implications.

However, we may have a misplaced nostalgia for formula grant.  Perhaps it has never been fair – but we liked that it aimed to be. As more criteria were added they blunted the overall impact – as is set out by the NAO in a new report on formula funding of local public services which highlights the complexity, obscurity and imperfection of national funding formulas.

There’s a lesson in that as hundreds of local council tax rebate schemes are developed.