England & Wales Finance

Where next for council funding? The view from East Anglia


Where next for council funding? That was the question we posed to our guests in Norwich City Hall at our recent roundtable on local government finance. We were joined by council leaders, cabinet members, chief executives and finance directors from councils across the East of England for a fascinating discussion of the key issues from their region’s perspective.

The roundtable was part of LGiU’s Local Finance Taskforce, a major project to elevate the profile of  the funding crisis in local government and to present sector-led solutions for the future. We are hosting events around the country to gather the views of senior decision-makers on the options contained in LGiU’s Local Finance Scorecard, published in June. From council tax revaluation to municipal bonds, tourism tax to nationally funded social care, we want to widen the scope of the debate and find a sustainable solution that serves local communities.

What was discussed?

Cllr Alan Waters, Leader of Norwich City Council, opened the session which he described as a timely opportunity to deepen our thinking as we face rapidly changing financial circumstances and an uncertain future for devolution.

Jonathan Carr-West, Chief Executive of LGiU, then introduced LGiU’s Local Finance Taskforce work, highlighting the stark fact that 8 in 10 council leaders and chief executives do not have confidence in the sustainability of local government finance. The work surrounding business rate retention and the funding formula is tinkering at the edge of a broken system, he argued, and while the sector is good at saying what it doesn’t like, we are less good at articulating solutions we can agree on. This project is designed to spark the wider conversation and to build much-needed consensus on the way forward.

The debate covered the five sections within the Local Finance Scorecard, with guests giving their views on each area.

1. Reforming business rates for the 21st century

Many guests were concerned about how the complexity of the business rate retention system was leading to public misunderstanding about who actually sets the rates and creates an antagonistic relationship between tiers of local government. There was some appetite for 100% Business Rate Retention to be fully rolled out immediately, but many also pointed out this may entrench economic divides between areas if we don’t work out the redistributive aspects of the new system and acknowledge that service demand has little connection to the business rate income of an area.

Similar concerns about entrenching economic division were raised when discussing allowing councils to raise the level of their local business rates (they can already lower them); however some were in favour of more control over this growth lever, particularly if it came alongside other local fiscal powers to reduce the reliance on the business rate system.

A key issue was the lack of control over key aspects of business rate policy, such as having to hold back large amounts of money in reserve to cover successful business rate appeals (handled externally by the VOA), not having control over discounts and exemptions and Enterprize Zones intercepting the returns on council investment into growth. They also highlighted the failure of the current property-based local taxation system to capture value from digital businesses operating in their area.

2. Making council tax fit for the future

Perhaps surprisingly, there was an attachment within the group to council tax, although they recognised that in its current form there are serious distortions. Holding on to some form of property-linked tax was seen as important as it is difficult to avoid, is a stable income source and helps retain local democratic accountability (as opposed to local income tax, for example).

Most people were resigned to the fact that revaluation of properties using up-to-date values is very unlikely to happen at the moment, considering it is a political hot potato and successive governments have avoided addressing it. There was, however, more appetite for looking at the council tax bands, either rebanding – which wouldn’t necessarily bring new money but would ensure the tax burden is more fair across income brackets – or adding new bands to capture higher value properties. There was also discussion of increased control over council tax exemptions and discounts.

The referendum requirement for raising council tax above a certain threshold was widely seen to be outdated and ripe for removal. They perceived it to be effectively a cap, as running a referendum is prohibitively expensive and very difficult to win when plugging gaps rather than delivering a specific new project. There was a strong feeling that local politicians should be allowed to face the consequences of raising council tax at the ballot box if they chose to do so.

3. Expanding our conversation about local taxation

The idea of a local tourist/hotel tax was very popular across all types and colours of council, with many councils struggling with the negative impact of large visitor numbers without being able to re-capture the value. Many people were concerned that local rate-payers were having to pick up the tab caused by mess and congestion caused by tourists.

However, for some areas a tourism/hotel tax would not capture much of the value brought by visitors as many only stay during the day. Instead, it was suggested that a local sales tax, a parking space levy on out of town car parks or a so-called ‘sin’ tax on local alcohol sales could address this imbalance. One guest raised the example of workplace parking space levies used in Nottingham to capture value from city centre workers who live out-of-town and another recommended the use of Business Improvement Districts.

Also raised was the question of collectability as well as concerns about relying on such taxes and charges as an income stream due to their volatility, crucial to any conversation about new local taxes. Similarly, the issue of enforcement was raised in light of cuts to police budgets for things like traffic offences.

4. Rethinking the division of money and responsibility between central and local government

Health and social care integration was discussed at length as a way of addressing the growing financial pressure on councils caused by adult social care. Although Westminster’s appetite for pushing forward with this work has waned, local government is making some progress through STPs (sustainability and transformation plans) with health services; however these systems are by their nature adversarial. There was agreement that a whole systems approach to health and social care was needed, but that this probably needs budgets to be integrated across services which is implausible while CCGs and councils are held to different financial standards (i.e. NHS bodies are allowed to overspend but councils cannot).

A couple of people suggested that social care should be delivered by the NHS, arguing that if the NHS failed to provide adequate social care there would be more public pressure; but others disagreed, saying that councils are best placed to deliver social care. What was clear, though, was the need to prevent the same residents being passed around several agencies without having their issues resolved.

More generally, there was little appetite to revert to central funding for council services for fear that too much local control and accountability would be relinquished and that it would lead to an uncertain funding situation. Instead, to address the lack of adequate funding for key services, we need a proper conversation about what constitutes an acceptable level of service and work backwards to see how funding should be split between local and central government sources.

5. New ways of allowing councils to access funds and invest in growth

On housing, there was strong consensus that the HRA cap should be lifted (this week’s news will have been a welcome surprise) and that councils should be allowed to keep the full proceeds of right-to-buy property sales, as opposed to the third they currently keep. One guest also argued for the restrictions over use of right-to-buy proceeds to be lifted.

Regarding the Municipal Bonds Agency, there were mixed feelings in the room about its viability despite broad support for the underlying ambition. The competitiveness of the interest rates and the uncertainty over liability were raised as concerns. Guests also had a cautious attitude to Social Impact Bonds, wondering how well evidenced their success has been and whether councils are in danger of setting up big liabilities for the future.

On borrowing more generally, risk was raised as a key factor. From a finance officer’s perspective in particular, it is impossible to judge the level of risk without having a stable core of funding such as multi-year budgets. There was a feeling that government had forced councils to take on more financial risk than they are comfortable with, while giving them more services to deliver.

One guest suggested councils should be allowed to separate their core from their risky endeavours, much as the banks now separate their ‘retail’ and ‘investment’ operations. Unlike the banks, local government takes on a lot of risk but is not allowed to fail.

This event was part of LGiU’s Local Finance Taskforce, a campaign for a fairer funding settlement for local government informed by the sector itself. Give your views on the options for reform through our online consultation form or tweet us @LGiU #FixCouncilFunding