Local government finance and the 2019 Spending Review Contents

4Spending Review and future reform

The role of local government and the funding gap

88.Establishing what is expected of local government is essential if decisions about funding can be properly made. A number of witnesses considered that there needed to be a discussion about what the role of local government was and what was expected of it. Sir Amyas Morse explained that:

Our 2018 financial sustainability report called for Departments to … think through at the next spending review what they wanted from local authorities. Is it to be a reduced offer centred on social care, or will it continue to say that it is a broader offer, including a wide range of service provision? Which of those is it? There is going to need to be some clarity as we approach the spending review as to what the purpose is.122

Neil-Amin Smith of the IFS made a similar point:

… when Government assess the spending needs of councils, they only do so on a relative basis, so how much councils need relative to each other. They do not attempt to make an assessment of how much councils need in total to provide a given level of services at a certain quality and at what efficiency they should be able to do that. It is a very difficult task to do that, but, especially given the spending review, it could be quite an important one to do. It would also force the Government to be more transparent about what we expect from local government and to have that discussion.123

89.In May 2019 the IFS published a report on council funding in England. This considered that “the total amount of funding available to councils looks like it will become increasingly inadequate, despite an end to overall budget cuts”. It said this was “because current plans seem to envisage councils relying on council tax and business rates for the vast bulk of their funding—and revenues from these taxes are unlikely to keep pace with rising costs and demands.” The report went on:

A big choice therefore looms:

• Either councils have to be provided with additional revenues, to enable them to continue providing existing services, let alone extend and improve them;

• Or government and society must accept that councils can afford to provide fewer or lower quality services than they currently do.124

90.In evidence to the Public Accounts Committee at the end of 2018 the Permanent Secretary implied that the Ministry assessed financial sustainability only in terms of delivery of statutory services.125 SIGOMA’s written evidence took issue with this and considered that “simply providing the statutory minimum is not sustainable”. It mentioned non-statutory services such as Youth Services, Sure Start and Early Years Provision which it considered had helped reduced demand on local authorities statutory services and other services provided by the wider public sector.126 The submission from Manchester City Council also criticised the Permanent Secretary’s definition of sustainability as being a too narrow view of the role of local government saying that it “shows a lack of appreciation for the wider role of local government in shaping communities and improving the economy”.127

91.Given that there is debate about the scope and quality of the services that local government is expected to provide, any quantification of the funding gap will always be open to challenge. At one extreme, some may argue that as long as a local authority is able to provide the bare minimum statutory services no funding gap exists. At the other end of the spectrum, others could highlight the fact that if local government spending power had kept pace with inflation since 2010 it would be around £10 billion higher than it currently is and this is before any consideration of increased demand. Nevertheless, it is useful to look at the analysis which has been done providing estimates of the funding gap.

Figure 3: Estimates of annual local government “funding gap”

Source: Local Government Association briefing, Debate on local government funding, 15 January 2019; PwC, Independent review of local government spending need and funding - Summary report, May 2019

92.The LGA’s submission estimated that the funding gap “was over £3 billion in 2019–20, and £8 billion in 2024–25”.128 The County Councils Network commissioned PwC to do independent analysis of the funding gap, which concluded that the funding gap was higher in the short term (£4.8 billion in 2019–20) than the LGA analysis, but slightly lower in the long term (£6.9 billion in 2024–25). For next year, 2020–21 both the LGA and PwC analysis assess that the funding gap will be around £5 billion (Figure 3). We asked the Minister for Local Government about these estimates. He said:

They are not exactly the same methodology. They end up in broadly similar places, and you can take from that what you want. We have absorbed those and are analysing them as we speak. As I said, I have sat down with both sets of people to understand them, but, of course, these are people who have a relatively detailed understanding of what is going on in the sector. It is right that their estimates are taken into account and put into the mix as we do ours as well.129

93.Another way of considering whether or not local government has enough funding is to look at the how its current expenditure level compares to past levels. As noted previously, spending levels have fallen significantly in real terms since 2010 however in the ten years before spending levels had risen. We asked Neil-Amin Smith of the IFS about current spending levels compared to 2000. He told us that spending in 2017–18 was higher in real terms than in had been in 2000–01, but he added that spending on local government as a proportion of national income (that is GDP) had fallen by 7% between 2000–01 and 2017–18.130 In comparison, spending on education was slightly higher as a percentage of GDP in 2017–18 than it was in 2000–01131 and public spending on the NHS as a percentage of GDP has increased significantly over the same period.132 If local government spending in England in 2018–19 was at the level it had been in 2000–01, as a proportion of GDP, the sector would have needed around £4 billion of additional funding. If local government spending in 2018–19 had matched the average spending level (as a proportion of GDP) that it had been between 2000–01 and 2018–19 it would need more still (Figure 4).

Figure 4: English local government net service expenditure133 as a proportion of GDP

Source: Scrutiny Unit analysis adapted from data in IFS written evidence (FSR0090), MHCLG, Local Authority revenue expenditure and financing England: 2018–19 budget, June 2018. HM Treasury, GDP deflators at market prices, and money GDP June 2019 (Quarterly National Accounts), June 2019.

94.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. Nevertheless, we agree with the IFS that local authorities need additional revenues to continue providing the services they currently do.

95.MHCLG, 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.

96.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.

Fair Funding Review

97.In 2016 the Government launched the Fair Funding Review to look at and revise the “underlying assessment of needs” of local authorities and how funding is allocated between them. There have been a number of consultations since then and MHCLG has convened a series of joint working groups with the LGA. The Government intends to implement the Fair Funding Review as of April 2020 for the 2020–21 financial year.134

98.We asked the witnesses about the ongoing work of the Fair Funding Review. Councillor Carter of the County Councils Network told us that any new funding formula should be “needs-led, evidence-based and fair, as far as it can be, but keeping it transparent and simple.” He told us that he was “encouraged by the work that has been done to date” and that “it is going in the right direction but needs a lot more work.”135 Councillor Fuller of the District Councils Network told the Committee “where we are at the moment, the formulae are substantially based on regressions, based on how much you had in the past. They were last really looked at in 2006–07”. He noted that the economy and the populations of different areas have changed since then and so that “the new system, where the funding is allocated on a population basis and people consume services, seems to have some merit.”136

99.We specifically asked the witnesses about the role of the deprivation of an area in determining their funding. Lord Porter told us that the “whole sector unanimously rejected taking deprivation out of the indices” and said he “would be very surprised if it does not feature in the Government’s formula.” Councillor Fuller considered that population was a bigger driver of cost than deprivation, so he thought that it was worthwhile giving a greater weighting to population size. The Minister for Local Government told us that they were trying to simplify the formula and had found that “deprivation was found not to be a particularly significant variable.” However, he added that deprivation does have a role in the formulas for services such as social care for children and adults which made up a large part of a local authorities funding.137

100.Other aspects of how the current distribution formula worked were critiqued in written evidence we received. Jim Vine, of the Department of Government at the University of Essex, told us that the current system included both equity objectives (ensuring that ‘postcode lotteries’ are minimised) and incentive objectives (allowing councils to keep some of their business rates growth). He explained that whatever the objectives of the formula were, it should not produce arbitrary results but had found that the current formula did. For example, when Wokingham’s funding allocation of £4.44 million was removed from the calculations rather than the money being redistributed between some or all of the remaining authorities “we find large and unjustified changes to the allocations of many authorities—including losses as well as gains. The biggest increase sees the ‘GLA–police’ authority being allocated £84.6 million more, and the biggest loss is Surrey, seeing its allocation drop by £35.6 million (over half of its total allocation).” He considered more testing needed to be done to prevent such arbitrary results in the future. His submission also recommended that that any transitional measures must unwind over time rather than being in place indefinitely as had been the case previously.138

101.Witnesses discussed the financial pressures different types of councils were under. Rob Whiteman of CIPFA considered that “counties are under, in relative terms, the greatest pressure, when looking at their budgets at the moment.” Professor Murphy agreed and pointed out that county councils had to some extent less flexibility as they delivered fewer services than unitary councils leaving them fewer other services to cut back on to keep social services going.139 Lord Porter of the LGA said that he understood that counties were under pressure due to the demands of social services but he also considered that there were arguably more small unitary councils “that are close to the edge”.140 Frances Foster of SIGOMA pointed out that “unless the overall pot is adequate, we are still going to have all the issues we have now”.141 Councillor Carter agreed saying that the priority was addressing the funding gap, he told us “it is all about the size of the cake first, and how it is sliced and diced from there on is secondary”.142

102.One criticism of the way that funding for councils is determined is that it is based on relative needs rather than any assessment of their absolute needs. Neil Amin-Smith from the IFS mentioned this and explained that the Government “do not attempt to make an assessment of how much councils need in total to provide a given level of services at a certain quality and at what efficiency they should be able to do that at”. He considered that “it is a very difficult task to do that, but, especially given the spending review, it could be quite an important one to do”143 Professor Travers made a similar point telling us that “new demands and burdens are costed out, but not the total of the existing ones”. He said that this meant that unless there was additional funding in the system a new formula “would simply mean taking money from some councils to give it to others”.144 The funding restraints that local government is under also makes any redistribution of funds more difficult. Rob Whiteman from CIPFA noted that:

I can remember periods, as my colleagues will, when there were arguments about who would get the most growth from a redistribution system. Nonetheless, at the time the sector was getting more money. Things like fair funding or redistribution become all the more serious and under more scrutiny when they take place during an unprecedented period of cuts and rising service pressures.145

103.The business rates retention system, discussed in Chapter 3, is designed to incentivise local authorities to grow their business rates—these potential revenues must also be factored into allocations. Councillor Fuller told us there are “so many moving parts” noting that we have “spoken about the costs; what about the revenues, business rates retention, other taxes and pooling? … even before we look at business rates reset”.146 The IFS’s submission considered that “the overarching question facing the Fair Funding Review is how to balance redistribution of funding according to need versus the desire to provide councils with financial incentives to tackle needs and boost growth.”147

104.Moving to new funding allocations will always create challenges—it is even more difficult during a time of financial restraint. This is another reason that providing additional funding for local government is so important—it will help to cushion the blow for those councils that lose out. The result of the Fair Funding Review is due to be implemented in 2020. However, this is now looking unlikely given that the timing of the Spending Review itself is in doubt.

105.We welcome the work that MHCLG has done to consult with the sector on the new funding formula. It is encouraging that the local government representatives we heard from are cautiously optimistic about the Fair Funding Review and new allocations. However, it is possible that everyone thinks they will gain from reform, which is almost certainly impossible. There will inevitably be winners and losers—providing transparency and clear explanation will be important in this regard.

106.There is a trade-off between redistribution and incentives. Full and very frequent redistribution of funding on the basis of needs and revenue-raising capacity would mean very little financial incentive for councils to tackle needs and boost their local tax. The choice over which to do should depend on judgements about the importance of redistribution and consistency in tax and spending (in which case grant funding would be preferable) relative to incentives and local discretion (which tax devolution supports). We believe that using the business rates system to try to achieve both objectives is unworkable, creating unnecessary bureaucracy and uncertainty for councils. A more simple system would allow for some limited gains to be made from incentives but for redistribution to be achieved through a separate grant.

107.The workings of any new formula should be as transparent and understandable as possible. The formula should also be tested to ensure that any arbitrary and unjustified results are minimised.

108.Councils need to be told as soon as possible what their new funding levels are for 2020–21. Delay is unreasonable and risks unnecessary reductions to spending in 2020–21.

Increased integration and devolution

109.The importance of local government services to other parts of the public sector and the potential benefits from increased integration were highlighted in our inquiry. Lord Porter of the LGA told us that without certainty on social care funding the “Government will be building uncertainty into their own health service”. He said that he had been to joint meetings with the Secretary of State for the Ministry of Housing, Communities and Local Government and the Secretary of State for Health and Social Care and said that “they do speak to each other; they do get it”.148 The written submission from NHS providers highlighted the benefits of a joined up approach: “it is worth noting however that DTOCs [Delayed Transfers of Care] decreased from a peak of 42,000 in 2016–17 as a result of increased integration between health and social care”. The submission also explained that “local councils are responsible for a wide range of services contributing to the wider determinants of health including housing, support for vulnerable families and children, aspects of education, local transport and employment.”149 Jeanelle De Gruchy of the Association of Directors of Public Health made a similar point noting that councils were in effect doing prevention work through services such as housing and education.150 We asked Ms De Grucy about the model in Greater Manchester—she explained that the local authority chief executive is also the CCG chief operating officer “so we are integrated in that way”. However, she considered the “real challenge” to integration was “the NHS having the different mechanism for funding and performance”.151

110.The link between housing and health was made by Councillor Fuller. He told us “having a clean environment and good housing is the biggest determinant of public health. The statutory housing services that the district councils do make an important contribution to reducing demand for the health service.”152 Another area where he considered there were potential overlaps and the opportunity for better integration was the benefit system. He explained “if you are on universal credit, often there is council tax support involved. Universal credit is run by DWP and council tax support is run by the local council, so there is a doubling up”. He continued:

If we have the aspiration to have the system around the individual, it would be much better for councils to operate a DWP system rather than sending people to DWP offices … We have more tools in our box than the DWP has. Calling for better integration and co-location is a much better outcome, leading to quite a material improvement in people’s lives.153

The Minister for Local Government told us that he would be open to local authorities providing other services such as this as he had seen it work well with public health.154

111.Crisis, the homeless charity, considered that “using pooled budgets across a range of public bodies including for example, mental health services, criminal justice agencies, substance and alcohol treatment” would help “incentivise better integration” and “better coordinated services”.155 Dr Jonathan Carr-West thought that the top down centralised nature of much of government posed challenges for better collaboration. He said integration of services was “going against the grain” and difficult at a local level “because everyone is operating to different rules, to different targets and with different budgets”.

112.Increased integration of services at a local level can help to provide improved services and better outcomes. However, the current centralised nature of government and the different funding, budgeting and performance mechanisms of different parts of the public sector can make this difficult.

113.MHCLG and the Department for Work and Pensions should consider creating a pilot scheme to see whether allowing local government employees to take more of a role in the benefits system would make the system more efficient and provide a better service for the public.

114.Arguably the most straightforward way to ensure that services are better integrated at a local level is through greater devolution. Andrew Carter of Centre for Cities told us that in the ideal world “he would love to see the Treasury take an area-based approach to the spending review” as he considered that “ it is only through an area-based approach that we will unlock the power and the returns of that integration.”156 Dr Jonathan Carr-West made a similar point explaining that “In the longer term … we need far more devolution … so we can do the joined-up preventive public services we need in order to manage these problems long term.”157 Rob Whiteman of CIPFA considered that “I suspect, in 20 or 30 years’ time, we will aggregate the state in local areas, and we will understand how much is spent in an area on all services”. However, he added “one day that is where we will be. I just do not know how we get there in the immediate future.”158

115.The written submission from Professor Travers highlighted the centralised nature of revenue raising in the UK, providing a table which showed that the UK was an outlier compared to other countries (Figure 5). Other submissions also highlighted this issue. Centre for London contrasted London’s reliance on central government for the majority of its revenues (70% of revenues) with other cities such as Paris (26%), New York (16.3%) and Tokyo (5.6%).159

Figure 5: Taxation revenue available to sub-national governments as a % of GDP

Source: Professor Tony Travers (FSR0111)

116.The call for increased devolution of tax raising powers appeared in numerous submissions that we received as part of the inquiry. Professor Colin Copus said that “a prolonged period of austerity makes it vital that a less centralised approach to local government finance is taken and that councils are able to replace lost central government financial support with locally raised taxation.” The submission went on:

Greater freedom in local taxation is necessary not only to reduce the centralised nature of government but to enable councils, that have detailed knowledge of local needs, to be able to finance not only service delivery, but also longer-term strategic policy for the development of their localities.160

Grant Thornton UK LLP’s submission stated that “we need to move to a basis where councils are able to own their own future and support their communities.” It considered that this required “fiscal devolution and choices over taxation”.161 Oldham Council called for increased devolution both in spending decisions and revenue raising powers. It said that “local areas need much greater control over resources to ensure that services are commissioned and delivered in an efficient and effective way to meet local priorities.”162

117.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.

118.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. It would also take the pressure off over-stretched Whitehall departments and ministers. However, it does present challenges—devolution of revenue raising is likely to result in increased divergence in the resources available to different areas and it may not be appropriate for some councils (for example those with a low population and tax base) to take on these risks. 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.

122 Q35

123 Q5

124 Institute for Fiscal Studies, English council funding: what’s happened and what’s next?, 29 May 2019

126 SIGOMA (FSR0074)

127 Manchester City Council (FSR0082)

128 Local Government Association (FSR0006)

129 Q174

130 Q3

131 House of Commons Library, Education spending in the UK, 10 May 2019

132 Nuffield Trust, 70 years of NHS spending, 21 March 2018

133 Local government net service expenditure in Figure 4 excludes spending on Education, Fire, Police and Public Health. Other adjustments have also been made to make the series comparable over time.

134 House of Commons Library, Reviewing and reforming local government finance, 15 March 2019

135 Q94

136 Q94

137 Q201

138 Jim Vine (FSR0035)

139 Q11

140 Q90

141 Q94

142 Q96

143 Q5

144 Q29

145 Q2

146 Q94

147 Institute for Fiscal Studies (FSR0090)

148 Q106

149 NHS Providers (FSR0045)

150 Q151

151 Q153

152 Q100

153 Q103

154 Q237

155 Crisis (FSR0049)

156 Q140

157 Q140

158 Q30

159 Centre for London (FSR0042)

160 Emeritus Professor Colin Copus (FSR0015)

161 Grant Thornton UK LLP (FSR0054)

162 Oldham Council (FSR0079)

Published: 21 August 2019