Funding Local Government: Lessons from the past and considerations for the future

As part of the Local Government series on innovation run by our Local Government liaison officer, Adam Allnutt, we held an event in Liverpool. Following a productive meeting, Sean Flynn writes on local government funding.

As the Conservative government’s austerity agenda enters an eighth year many councils are struggling to allocate the necessary funding to deliver key public services. This period of austerity has coincided with significant reforms to the funding of local government at the Department for Communities and Local Government (DCLG). Such reforms have seen a move away from a centralised model, where funds are allocated on the basis of an assessment of relative need and resources, towards a model which provides fiscal incentives for councils to increase local tax revenues and become self-funding. A recent report from the Institute for Fiscal Studies (IFS) has assessed the impact of the policies introduced by DCLG since 2010 on the spending power of local governments across the UK and has also provided an analysis of the 100% business rates retention scheme (BRRS) which is due to be implemented in 2020.

Since 2009/10 council budgets have on average decreased by almost 26% when measured on a consistent basis accounting for council type and services provided. This has drastically reduced the spending power of local governments and has forced the protection of core service budgets by subsidising smaller cuts to core services, for example social services (-10.4%), by making deeper cuts to secondary service budgets including planning and development (-58.9%). Consequently, in the midst of a housing crisis we find councils unable to commit sufficient resources to build the affordable homes required and a diminished ability to resist the advances of property speculators when for example they offer to redevelop large run down estates without offering enough affordable housing.

During this time the composition of local government income has drastically changed. In 2009/10 local government income consisted of general formula grants, council tax revenues and specific grants which on average comprised 44%, 41% and 15% of local government revenues respectively. In an attempt to decrease the UK budget deficit, central grant funding has been where the DCLG under both the coalition and conservative governments have cut back dramatically.  Real terms local government funding from grants has decreased by 70.5% since 2009/10 and in 2016/17 combined grants contributed only 23% of local government income, down by 35%. Although reductions in grant funding have been partially off-set by the introduction of the BRRS, which allows local authorities to retain a proportion of business rates, adjustments in the composition of local government revenues have had disproportionate effects on the spending powers of local governments.

Grant funding now comprises a smaller percentage of local government income for councils that generate high council tax receipts, normally in wealthy areas with less complex demands on their services; in contrast it is councils with low council tax receipts, normally in poorer areas with higher and more complex demands, that are heavily reliant upon government grants to meet local funding needs. Examples include affluent councils in the South-East including Windsor and Maidenhead, Wokingham and Surrey where grant funding makes up less than a third of local government income; compared with urban areas such as Tower Hamlets, Wandsworth and Westminster where grants make up as high as 85% of local government income. IFS analysis shows that, despite policy changes aimed at distributing austerity evenly, between 2009/10 and 2016/17 grant dependence was the key factor driving inequality in spending power decreases experienced by councils across the UK. Councils most reliant on grant funding received the largest cuts to service spending, with the most and least grant dependant deciles receiving service spending cuts of 33% and 9% respectively during this time period. Although changes made to the funding formula in 2016/17 prioritised effects on local government spending power, it remains clear that the public spending reductions implemented by DCLG between 2009/10 and 2016/17 were borne mostly by councils most reliant on grant funding.

The DCLG are now moving away from the centrally funded grant model in an attempt to provide ‘fiscal incentives’ for councils to pursue local economic development by devolving the responsibility for councils to generate their own income. The partial BRRS was introduced in 2013/14 which allows councils to retain up to 50% of growth in local business rates revenues. Further reforms are due to take place from April 2020 when the BRRS will be extended to 100% growth in local business rates revenues and will be accompanied by the abolition of the general formula grant; the additional funding available will be absorbed by further devolution of powers to local authorities. Although the BRRS requires councils to build revenue reserves to cover successful appeals, council budgets are still exposed to increased risk compared to previous models where funding was pooled nationally. Redistribution of revenues currently occurs through a tariffs and top-ups scheme where revenues are redirected from councils generating high business rates revenues to councils with low business rates receipts. The IFS estimates that the BRRS is likely to produce further divergence in council spending powers due to large differences between tax bases. It is also unlikely that the proposed business rates multiplier will keep pace with business rates growth, reducing the effectiveness of the tariffs and top-ups revenue redistribution scheme. This has been addressed in a report by the Institute for Public Policy Research who have proposed an alternative method for calculating the amount of business rates revenues which should be retained by individual councils.

As we undergo a period of reform to local government funding it is important to understand the impact of failures to accurately and regularly assess disproportionate reductions in spending powers across local authority areas. The implementation of the BRRS is a major change in how local authorities are funded and will require intense scrutiny to ensure (1) effectiveness in persuading local authorities to increase business rate revenue further, (2) a fair redistribution or rebalancing process which targets helping “poorer” councils increase business rates revenues rather than just meet their funding shortages and (3) protection of council budgets following unexpected decreases in business rates revenues. The debate surrounding this policy is likely to involve the levels and methods of revenue redistribution across the country. On the left we must see this as an opportunity to pursue specific economic and electoral objectives, in particular as a tool to create the kind of economy that we wish for our country – not just in cities but in towns and the countryside as well.  The success of Labour’s local government funding strategy must not be measured by the scale of revenue redistribution but by the proportion of local authorities who acquire financial autonomy as combined council tax and business rates revenues exceed spending needs. The retention of capital within the micro economies of small towns is crucial in ensuring the success of such policies. Labour can promote this by devolving additional spending responsibilities which will provide a fiscal stimulus for local economic growth and empower local authorities to restrict the flow of capital from their towns back towards larger, more economically developed cities.

The failures of successive governments to address the city-centric globalisation of our economy have given rise to social divides which can be drawn across geographical boundaries. Large cities have thrived while many smaller towns and rural areas, who have experienced industry relocations and job losses, feel abandoned. These social divides have been exacerbated not only by a divisive right-wing media, who look to blame anybody from benefit claimants to refugees, but by those who have refused to accept legitimate concerns in relation to an absence of opportunity. During the European Union (EU) referendum it was those hit hardest by austerity, left behind following an era of globalisation, deprived of prosperity and opportunity who voted en masse to leave the EU, despite numerous forecasts highlighting the likely economic costs. This demonstrates how the growth potential of the UK economy is constrained by the social and geographic divides within our society and highlights a need to rebalance the economy across the whole of the UK. The funding of local government is one vehicle through which Labour can initiate positive change by ensuring that all councils have the opportunity to attract businesses and jobs, to the benefit of their local communities. It is Labour councils who are leading the country in the development of new economic models, as seen with the Preston Economic Model and Durham Action Areas, which promote the growth and democratisation of local economies through inward investment and municipal socialism. Labour can encourage such economic strategies by showing a commitment to further devolution of powers to local government, in particular by increasing borrowing powers to equip councils with the funding necessary to invest in their communities. Only by ensuring that such opportunities are available in all corners of the UK can we start to heal the social divides within our country and create an economy which works for the many, not the few.


Sean Flynn is a Young Fabian. Follow him on Twitter at @s_flynn1991

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