The gap between the wealthy and the poor will only get wider until local government funding is reformed

Posted on February 06, 2024

Much is being said at the moment on the future of council finances.

Are councils managing their budgets well?

Is there enough money in the system?

Is government money fairly distributed?

Are we asking too much from too little?

Could other funding sources be looked at?

The debate goes on.

One common agreement is that more resources are needed. Based on the government's unprecedented intervention with £600m of additional funding last week, days before council budgets are due to be made public, it is clear they are beginning to acknowledge that more funding is needed.

What is also clear is that we need to make sure the money already in the system is going where it is needed and providing a stable platform to build from.

To begin with, we need to start with business rates, with a full reset of the business rates growth retention scheme. Government grant to councils is funded through business rates, collected by local authorities, being amassed into a national pot, and then redistributed on a needs basis.

Business rates growth retention began in 2013-14 and has allowed councils to keep the real-terms business rates growth in their local area. This has meant that areas with thriving local economies have been able to receive more funding than would normally be allocated on a needs basis. As I predicted a decade ago, it has meant that there is a growing gap between the richest and poorest areas.

It has been part of an overall shift in local government finances that has undermined a needs-based distribution, where funding primarily follows deprivation. The proportion of funding for local authorities that is grant has fallen from 55% to 37% since 2013.

As grant income has been cut significantly, councils are increasingly reliant on Council Tax and business rates growth. This has massively harmed the most deprived areas which raise much less from Council Tax increases or retained business rates growth.

This is distorting council incomes significantly, it’s part of the reason councils with high levels of need and deprivation, but low growth, are struggling.

When the scheme was set-up, there was a promise that there would be a reset in 2020. This would have put all the growth back in the needs pot. However, this reset never occurred and we have calculated that since 2020, SIGOMA authorities have collectively lost out on £150m per year when you compare their retained growth to what they would have received if the funding was allocated on a needs basis.

Local public services should be funded on the basis of need not the vagaries of a business rate growth system.

Could you imagine funding the NHS on that basis?

The number of hip replacements or cancer treatments in your local hospital being determined by how many new businesses there are in your area.

There would be a national outcry. Yet, that is what funding for adult social care and children’s services is moving towards.

It’s not just nonsense, it is dangerous nonsense.

The second step towards stability is to put the needs assessment of council spending into an independent body. Political interference dogs the current approach – the Prime Minister himself boasted to his Conservative Party members of how he had moved money from ‘deprived urban areas’ to more rural Conservative places.

We need to have confidence grant is being allocated objectively and fairly. Other countries like Australia do this - so should we.

The third step should be to remove business rates from local government funding altogether and fund grant from general taxation.

Business rates are volatile and complex and reduce any chance of fiscal stability in local authorities; and as we are seeing distort any needs analysis.

Equally, business rates ability to reform to help, particularly small, businesses, is restricted because of councils being dependent on that income. It’s time to change.

The fourth step should be longer term funding settlements for councils – ideally, they should cover 5 years.

Formulas used to allocate funding based on deprivation will need 5 yearly reviews and stability over that period will help councils plan more effectively. Data reviews halfway through this would update any changes to needs in the interim.

The next step should be to look at and update the council tax system – it’s out of date.

How much Council Tax a council can raise varies widely as does people’s ability to pay, it’s all out of sync. When Wokingham Council, the most affluent upper-tier local authority in England, raises council tax, it raises twice as much per household as Hull or Manchester. In the most recent settlement, more than half of the overall increase was from assumed Council Tax increases – it is clear which areas benefit from this.

Those impacts should be part of the needs analysis when allocating grant.

Finally, we need to begin a dialogue of other funding streams. This is easier said than done and must be underpinned by equalisation. We don’t want to drift back to the divisions we now have.

If the Government wants to incentivise economic growth, then this must be done with a pot of money outside of the local government system, rather than top slicing funding that is required to deliver front-line services.

Of course, none of this solves the underlying issue of the overall funding shortages we are experiencing.

This will always be a challenge for any government trying to balance overall public spending.

The requirement for government support for the sector will be less under an equalised system than that under one with huge financial disparities.

It will also give a level playing field to councils which is essential as government increasingly tries to regulate council performance and promises intervention if we fail.

The local government funding system is broken. It desperately needs reforming else we will see the gap between poor and wealthy grow wider, and the number of struggling councils continue to rise.

This article appeared in the weekend edition of the Yorkshire Post on 3 February. Read the article in full here.