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Solace blog

16th July 2019

Why can we not get local government funding right?

The financial sustainability of our local government sector has significant impacts on everyone in our country. Yet the severity of the ongoing funding shortfall and the lack of certainty on funding beyond 2020, has still not made it to the top of government’s agenda – as Brexit continues to crowd out the domestic policy agenda. With a new Prime Minister on the horizon, it is vital that whoever takes top spot understands and prioritises the situation facing local government. How likely this is to happen though, remains to be seen.

Every local authority shares a common aim – to secure the best possible outcomes for local communities and a healthy and productive local economy. But local government has been significantly affected by a decade of austerity and the very public struggles of Northamptonshire and Somerset County Councils last year demonstrate the significant challenges many councils, and in turn, their citizens, are facing.

The current state of local government funding is bleak. Our own analysis shows that 43% of councils overspent on their budgets in the 2017/18 financial year, led mainly by increasing costs for homelessness, and adults and children’s services. Over the same period, we also found that demand-led services as a percentage of total spend continued to rise, reaching up to 80% in some cases and over two-thirds of spending in a large number of councils.

Local government finance has always been complex, and the various sources of funding have not always sat well with councils, the public, businesses or central government.

The last 20 years have seen various different approaches. The Blair and Brown governments brought a significant increase in funding, but this came with increased inspections and centralisation. This was followed by a period of greater freedom, but also austerity, under the Coalition and Conservative governments, during which Whitehall has controlled the sector by reducing both its funding and its capacity to invest in its communities. This has had negative impacts on the public realm and created a sense for those who work in senior local government roles that they have limitations on their ability to engender change locally.

We believe that local government funding should be driven by local political choice where local leaders are more accountable for the money they spend and the taxes they raise than they are now and have the power to decide what is best for their area.

For this to become a reality, it would require a mindset change in central government, regardless of which government was in power. Council tax would need to be reformed, with a clear revaluation as soon as possible. Crucially, council tax reform should include the lifting of the referendum cap. This would enable local taxes to be introduced to meet specific local needs and move us to a place where local government is not dependent on the political colour in Westminster but rather the political colour in the Town Hall. Providing some form of fiscal devolution – such as a local income tax or tourism tax – while not the perfect solution, would also go some way in helping councils better support their local priorities.

Business rates redistribution seems here to stay but is hugely complex and difficult to understand. Whether it is a genuinely sustainable model for the 21st century is also debatable, amid the inexorable rise of online retail models. By allowing councils to retain 75% of business rates, the government hopes the sector will be able to grow its funding by creating the right conditions for growth. The sector will be allowed to keep additional funding generated by a dynamic economy – but this model has two main flaws.

First, the business rates model is increasingly under attack from businesses. It penalises high-street brands, who are big property owners compared to their internet rivals who pay far less in tax. Businesses are also becoming aware that they will provide the majority of funding for local services and, as a result, increasingly want a say. This leads to some fundamental questions, such as whether businesses should pay for services such as local children’s care and homelessness challenges.

Second, the growth incentive to local government bumps up against Brexit. The government’s own figures show that whatever form of Brexit is agreed will have a negative impact on predicted economic growth. This impact is also skewed across regions, with the North East forecast to experience the biggest downturn. While the business rates retention plan will reflect fair funding and redistribution, Brexit looks likely to make the overall cake smaller.

Central government may well understand local government financial pressures, but they are not being prioritised. In effect, the end to austerity was marked by giving the NHS the 10-year plan funding and raising local government spending by 1.5 to 2%. Government may know that this is insufficient for demand-led services but doesn’t appear to have much flexibility in its armour, now it has invested all its eggs in the NHS basket.

For the sector to become sustainable, we need to move to a basis where councils are able to own their own future and support their communities. This requires a twin-track approach of fiscal devolution and choices over taxation, together with major regional post Brexit infrastructure investment, to enhance the current LEP led Industrial Strategy work in regional localities.

Most importantly though, we need to create a culture where local government has permission to act in the interests of its residents and businesses and can own its risk appetite. This can only be created by government accepting that the centralised model of the last 40 years has been unsuccessful and was at the heart of the Brexit vote, as many communities feel as ignored by Westminster as they seem distant from Brussels. Fiscal devolution coupled with increased regional infrastructure funds are the only way out of this logjam.

Paul Dossett, head of local government, Grant Thornton UK LLP