The ministry must revise its fair funding approach

Posted on January 28, 2019

We welcome the County Councils Network’s statement last week that it wants to ensure the fair funding review is evidence based, needs-led and fair. But the Ministry of Housing, Communities & Local Government’s current proposals risk replacing one unfair system with another, and we are keen to avoid this.

We also welcome the network’s emphasis on the importance of securing additional resources at the spending review to put the sector on a more sustainable footing. The Special Interest Group of Municipal Authorities (SIGOMA) has made the same arguments from the start, and will continue to do so.

The County Councils Network is also right to argue deprivation should remain a factor in people-based services. People rely on services like homelessness support, libraries and public transport every day, especially in deprived areas. But the government is currently proposing to include these in an unweighted foundation formula.

People who don’t own property and have no savings are at greater risk of becoming homeless. People who can’t afford a car are more reliant on public transport. And people who can’t afford a computer often rely on libraries to look for work and function in the modern world.

Drawing the technical distinction between people and non-people based services is therefore unhelpful if we want a constructive debate about relative need. Residents won’t see it this way and nor should we.

The counties note too that, in the current formula “weightings for density in the revenue support grant are eight times higher than for sparsity and the evidence simply doesn’t justify this”. We would be interested to see this evidence.

Even if accurate, the point is irrelevant to the debate. The consultation is not about the old formula, but the proposed replacement, which doesn’t carry the previous weightings. That it was perceived by one group of authorities to be unfair in the past is not a justification for it swinging to another unfair extreme.

The sector agrees, as the counties say, that the current formula is opaque and that its replacement should be simpler to understand. But the sector does not agree that a simpler formula should be introduced at the expense of accuracy.

The counties talk about the old formula being unfit for purpose. But, since the sector agrees the purpose of a needs formula is to allocate funding based on relative need – as the name implies – we think the proposals set out in the new formula are even less fit for purpose. When the counties argue for a flatter formula, it is hard not to see this as an argument that needs should matter less.

Their response also seeks to rebut two arguments that we have not made. It implies we have argued that deprivation will be ignored. We have only argued it will be ignored in the foundation formula, which would allocate around a third of upper-tier funding under current proposals.

The response also implies we have argued against the principle of an area cost adjustment, which would also recognise the different cost of labour in places like London. We don’t object to such adjustments if applied and weighted in line with appropriate evidence. We have only argued that rurality should not be applied to services where it cannot be shown that this drives higher costs.

On a broader point, it is in the interests of the whole sector that the fair funding review should be evidence-based. Yet the evidence shows two things which are logically irreconcilable with the proposals put forward in the latest consultation.

The government’s own regression analysis, included in the consultation, shows that deprivation is a relevant cost driver. In fact it is the most significant cost driver after population for the services included in the upper-tier foundation formula.

The regression analysis appears to have been applied to the aggregate costs of services included in the foundation formula. This means we have no way of knowing how services like waste disposal, public transport libraries and homelessness are differently affected by deprivation.

It is not just Sigoma that has viewed this with concern. London Councils is also worried and the Local Government Association has argued that a more detailed technical document is needed.

Rurality is also conspicuous by its absence from this analysis. No explanation is given for its differential treatment.

The government is proposing to include rurality in an area cost adjustment that would apply to all formulae with the sole exception of legacy capital finance.

In 2014, the government commissioned independent researchers from LG Futures to investigate the impact of rurality on service delivery costs. They concluded there was a link between sparsity and unit costs in 11 services, accounting for £7bn or 15% of overall local authority spending. Sparsity was also “significantly and negatively” associated with unit costs in 15 services, accounting for £14.6bn or 31% of total expenditure.

The government states in the consultation that rurality drives higher costs for some services. We agree. What we disagree with is the giant leap from this conclusion to the application of an area cost adjustment including rurality to almost all services.

We want to work constructively with the sector to have an evidence-based and objective debate about the future funding of local government. It would be regrettable if one opaque formula perceived as unfair by half the sector was replaced by another.

In this vein, we welcome the LGA’s support for the inclusion of deprivation in the foundation formula. With the sector now in broad agreement on this crucial issue, we are hopeful that MHCLG will do the right thing and revise its approach.