Local authorities need more than just more funds, they need a whole new funding settlement – TUC

Local authorities have seen savage cuts, but they don’t just need more money, they need a whole new way of allocating funding. Kamaljeet Gill is a policy officer specialising in public services at the Trades Union Congress (TUC).

Boris Johnson began his time as prime minister with a raft of promises on public spending. The Autumn spending review followed suit with commitments to more cash for police and prison officers and the NHS. But, despite some additional money for councils (in particular for social care), promises on public sector funding have so far failed to tackle the truly catastrophic impact of austerity on local authorities.

In September, the TUC and the New Economic Foundation (NEF) published research that showed just how far local authority funding has fallen, and how much worse it will get unless the government takes action. NEF found that councils will need an extra £6bn in real terms to cover their funding gap between now and 2024/25. In order to return to the levels of service councils used to provide in 2009/10 they would need an extra £25bn. But the problem isn’t just the amount of money they need, it’s the whole way that funds are provided.

Since 2010, the money local authorities receive from central government, has been slashed by 86%. The consequences of this have been felt all over the country; spending on homelessness prevention dropped 46% while homelessness increased by 58%: one in ten libraries were shut down between 2010-11 and 2016-17, weekly domestic waste collections have reduced by a third, and subsidised public bus transport travel has fallen by almost half. Non-ringfenced grants to local authorities have plummeted from £32.2bn in 2009/10 to £4.5bn by 2019/20.
But national figures disguise huge inequality from council to council. Some councils rely more on central government funding than others. It might be that they have populations that are very dependent on their services, for instance because they are older and have higher care needs. Or it might be that they receive less money from other sources, for instance through council tax, because of the nature of the housing stock in the authority. Or it may generate less income through business rates, if it doesn’t contain many commercial properties within its boundaries. Or it could be a combination of all these.

This inequality is only going to get worse, because of a change in the way that local government is funded. Until 2013, councils collected business rates from businesses that owned property in the local authority. This money was sent directly to central government, and then reallocated according to the needs of the local authority. But since 2013, the government has been letting local authorities retain a proportion of their business rates and a proportion of the growth in their business rates (up to 50%). The idea was to encourage them to grow the business base in their areas and become less reliant on central government funding. At the same time, funding from central government has declined. Several councils have been trialling retaining higher rates through pilots (up to 100%). It is expected that councils will retain a higher proportion of rates and growth from next year.

But as we have already noted, local authorities’ income generation can be highly unequal, as can the demand for their services. At the moment there is a complicated system of top-ups and tariffs to try and smooth this. But as the level of funding from central government vanishes, and demographic pressures on council services increase, local councils will become more and more unequal.

Assessing the comparable level of need for local authorities over time is complex. Between 2010 and 2019 Local Authorities gained responsibility for some health and social care provision and for homelessness reduction. Additional funding accompanied these changes, much of this will disappear as central government grants are replaced by increased rates retention.

What’s more, the research assumes that we don’t crash out of the EU without a deal. The Bank of England has warned that if we do crash out, we risk a severe recession. In that case, local councils would be vulnerable to the economic downturn, but they would also face increased pressure on their services. To take just one example, many would face an influx of UK pensioners, currently resident in the EU, but forced to return by Brexit.

A new approach is needed that closes funding gaps, addresses inequalities in distribution, and is responsive to differing levels of need from demographic pressures.

If the prime minister really wants to demonstrate his commitment to the public sector, he could do worse than commit to reviewing local authority funding. Not just the amounts – though certainly that too. But how that funding is allocated.

If local authority funding includes incentives to encourage councils to promote business growth, it shouldn’t penalise communities with less resources or greater needs. Current rules on business rate retention should be amended. Council funding should be based on the needs of communities, not just their ability to grow business rate income.

One option is the ‘growth first model’ – first proposed by IPPR – that ensures that any system of business rate retention enables all councils to grow their funding in line with the needs of their communities. Councils with higher funding needs (either more demand or less income) would be allowed to keep a greater proportion of their business rates.
Every community needs good local services to thrive. But local authorities have seen their ability to provide for communities slashed. What’s more, the cuts have fallen much harder on some authorities than others. Current plans to review the funding settlement and reform business rates retention don’t go nearly far enough. The government have delayed implementing further rates retention. We should use it to find a radical solution, that restores the money councils need and restores fairness to the way they are funded.

Further information:

Public Sector Focus