Summary
Funding for local government has been cut significantly since 2010. At the same time as cutting funding, the Government restricted local authorities’ ability to raise council tax to fill the gap. In recent years spending reductions have been less severe but local government spending is still much lower in real-terms than it was in 2010. In response to this financial pressure, local government has had little choice but to cut back on the non-statutory services it provides. For example, net expenditure on planning & development and housing services has more than halved and net spending on highways & transport and cultural & leisure services is down more than 40%. Increasing demand for adult social care means that this trend is set to continue unless local government is provided with additional central government funding or the power to raise more revenues locally.
Almost a decade of funding reductions has been accompanied by a move to business rate retention. This has made the local government finance system more complex, less transparent and has increased risks for some councils. Central government policy has also been inconsistent. NHS funding was protected but funding for adult social care was not. Councils were initially incentivised to freeze council tax but there is now an assumption that they will put it up above inflation. The lack of any council tax revaluation since the early 1990s also means that council tax is becoming disconnected from property values.
Local government currently faces significant uncertainty. It needs to be able to plan for 2020–21 but there is a risk that the multi-year Spending Review may be delayed. A new funding formula and 75% business rate retention is also due in April 2020. There is also still no sign of the Green Paper on adult social care which was originally scheduled for 2017.
Local government provides services for everyone but much of its resources are focused on some of the most vulnerable people in society. Children in care, adults with learning disabilities, the elderly in need of care and families at risk of homelessness are all reliant on services funded by local government.
The current uncertainty for local government and the lack of funding for services must be addressed as a matter of urgency. Our main conclusions and recommendations are as follows:
Reduction in non-statutory services
- Local government must balance the books each year—the severe funding reductions it has faced has meant it has focused its spending on the acute pressures and has had no choice but to cut non-statutory services.
Forcing local government to reduce resources for these services may cause higher costs in the future or just move pressures to other parts of the public sector.
Social care
- The rising demands of social care (both for adults and children) are placing local government under increasing financial pressure. These services help some of the most vulnerable in society so must be properly funded.
Governments have been reviewing the funding of adult social care for some years but without conclusion. Without a solution local government will continue to be forced to cut back on the other services that it provides. Our recent report on adult social care highlighted the need for increased funding. We reiterate the recommendations we previously made—there is a need for new revenue resources both at a local and national level. Local government must be given additional central government funding or powers to raise more revenue to deal with growing demand.
Uncertainty
- Providing a multi-year funding settlement has allowed councils to plan ahead. However, the four-year settlement is now coming to an end, with no plans for the next financial year. The resulting uncertainty is causing problems for local government.
Without clarity about funding in 2020 some local authorities will need to prepare for the worst, making decisions which may unnecessarily reduce spending and represent poor value for money in the longer term.
Business rates
- The business rate retention system is too complex and lacks transparency.
The tax is already coming under pressure from changes in the economy and the Treasury Committee is currently conducting an inquiry on the tax and its impact on business. Calls for reform are growing louder—it is hard to see how it will endure over the long term.
- MHCLG needs to reform and make substantial changes to the business rate retention system.
The Government should consider making the system simpler by bringing back the Revenue Support Grant to redistribute to councils in need rather than trying to do this through an increasingly complex business rates retention system. The Government also needs to start considering alternatives to business rates as a revenue stream for local government, given the risks to this tax over the long-term.
Council tax
- Council tax is a regressive tax which has become disconnected from property values.
As part of a review of council tax, the Government should consider the case for creating new council tax bands at the top and bottom of the scale. We will return to this in our progress on devolution in England inquiry.
A revaluation for council tax purposes is long overdue. The Government should hold a review into how a revaluation could be implemented without dramatic increases for individual households. Any revaluation should be revenue neutral at the national level. Revaluation also does not mean that significant changes in council tax must be put in place immediately, it could be phased in over time.
Expectations for local government and the need for additional funding
- There is a lack of clarity about what is expected of local government. This ambiguity makes it difficult to clearly determine how much additional funding the sector needs.
The Ministry of Housing, Communities and Local Government, working with HM Treasury and other departments, should clearly set out what tasks are expected of local government and how much funding it requires. It should draw upon the work of academics and other experts, such as the National Audit Office.
- If HM Treasury wants local government to continue providing the services it currently does it needs to provide local government with a significant real-terms increase in its spending power.
To restore local government expenditure to the position it was, as a share of GDP, in 2000–01 would require an increase of around £4 billion—that is before taking into account the increased demands for services such as adult social care and children’s services over the last twenty years. Analysis by the Local Government Association (LGA) and also independent analysis from PwC on behalf of the County Councils Network both assess that the annual funding gap for local government will be around £5 billion in 2020–21. Looking further forward the LGA’s analysis has estimated that by 2024–25 the funding gap will be around £8 billion.
Longer-term reform and devolution
- In the short-term local government needs increased support from central government, but over the medium to longer term other solutions are needed to ensure that local government is financially sustainable.
There is now significant urgency in delivering a solid future for the funding of local government in England. A decade of expenditure reductions has both service-delivery and constitutional implications.
- Devolution of more responsibilities and revenue-raising powers to local government has the potential to improve the financial sustainability of the sector and allow better and more integrated services for the public.
We intend to undertake a review of the progress of devolution in England which will examine a range of issues including access to new sources of revenue.
Published: 21 August 2019