Local government finance and the 2019 Spending Review Contents

Conclusions and recommendations

Local government funding

1.Local government has coped with a prolonged period of real-terms spending reduction which is without parallel in modern times. This large fall in local authorities’ resources has been primarily caused by very significant cuts in central government grants. (Paragraph 10)

2.The demand for costly and essential services which local authorities provide, such as adult and children’s social care, has increased during this period of funding cuts. Some of these demands are being caused by failures or spending reductions in other parts of the Government, such as benefit reforms and changes. (Paragraph 18)

3.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. (Paragraph 25)

4.A number of local authorities have turned to commercial property investments funded with debt from the Public Works Loan Board to provide additional income. We welcome the tightening of the guidance to place more limitations on borrowing for commercial property acquisitions where such activity threatens financial sustainability of the local authority. (Paragraph 28)

5.Data available on the financial and operational performance of local authorities is limited—this makes it more difficult to assess whether spending cuts are being achieved through efficiency or deteriorating service standards. (Paragraph 36)

6.We welcome the Government’s decision to undertake a review of local government audit. The review should, among other issues, consider how auditors can be more effectively used to highlight risks to financial sustainability, operational performance and value for money of local authorities. (Paragraph 37)

7.The Government should develop a more regularised and consistent approach to the collection and monitoring of comparative data about councils’ performance, efficiency and financial sustainability. The current situation means there can be no certainty about the state of individual councils or the sector as a whole. (Paragraph 38)

Sustainability of the current system

8.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. (Paragraph 45)

9.Our recent report on adult social care highlighted the need for increased funding. We reiterate the recommendations we previously made—there is 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. (Paragraph 46)

10.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. (Paragraph 53)

11.Ideally local authorities would already know their level of funding for 2020–21 to allow them to effectively plan for the coming year. We recommend that MHCLG and HM Treasury provide a multi-year settlement for local government which runs for one year beyond the Spending Review period—the same approach that is currently used for Departmental capital budgets. In the short-term the Government should provide assurance on 2020–21 funding as soon as possible—for example by stating that no council will receive less in real terms spending power in 2020–21 than they did in 2019–20. Such a commitment should apply to services not covered by any ring-fenced resources for adult social care. (Paragraph 54)

12.It would be better to adequately and sustainably fund councils and to rely less on one-off pots of cash. If necessary, any additional funding should be distributed as quickly and efficiently as possible with any bidding process kept to a minimum. (Paragraph 55)

13.We welcome policies which allow local government to have more control of the revenue it raises and how it is spent. However, the business rate retention system is too complex and lacks transparency—the system attempts to create incentives for growth whilst also redistributing revenues according to need. 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. (Paragraph 63)

14.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. (Paragraph 64)

15.Council tax is a regressive tax which has become disconnected from property values. All houses built over the last 25 years still have to be valued by the assessor as to what the value of the property would have been in 1991. This cannot continue. There needs to be a review of council tax including revaluation, the number of bands and the ratio between bands. Some form of revaluation of bands to reflect prices today is required. There is also potential for raising more sums from high value properties by increasing the number of bands. (Paragraph 73)

16.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. (Paragraph 74)

17.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. We recognise there will be effects on individual authorities and adjustments to the equalisation system will be needed to deal with this. Under any revaluation the bands will need to be adjusted to reflect changes in property prices over time. (Paragraph 75)

18.We believe that, in general, the level of fees is best decided locally. Central government should not dictate fees for services, such as planning, at a level that means councils are unable to recover their costs. (Paragraph 79)

19.Councils are turning to fees and charges to generate income. This is a logical consequence of significantly reduced central government support—increasing fees is one of the few ways councils can generate income, given council tax rises are restricted. Nevertheless, we have concerns about higher fees and the introduction of new user charges for essential services. Council taxpayers may feel like they are paying twice for services and fees are usually unrelated to the ability of a user to pay. There may also be unintended consequences—for example high waste disposal fees may encourage fly-tipping. (Paragraph 80)

20.Increases in the National Living Wage and other new responsibilities for employers such as the Apprenticeship Levy can result in significant cost increases for local government. Councils ability to raise revenue to pay for these increased costs is extremely limited particularly in areas with a low council tax base. Increases in the pay for the low paid are important. However, while central government can benefit financially through lower benefit payments and higher tax revenues central government provides no additional funding for local government to recognise these above inflation cost increases. (Paragraph 85)

21.When the MHCLG sets out the spending power increases of local government it doesn’t provide any context for the spending pressures that local government is under. Therefore, it is difficult to judge if the changes in spending power represent real-terms increases when taking account of increased costs of and demand for services. (Paragraph 86)

22.The Minister for Local Government told us that MHCLG produces figures on the spending inflation levels of different local government services. It should publish past assessments (from 2015 onwards) on service cost inflation. It should also publish these figures and an average ‘local government inflation’ figure alongside other documents relating to the annual local government finance settlement each year. This will allow parliament and the public to assess whether councils are receiving real terms increases in their spending power or not. The Office for Budget Responsibility could have a role in overseeing the quality of such a process. (Paragraph 87)

Spending Review and future reform

23.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. (Paragraph 94)

24.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. (Paragraph 95)

25.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. (Paragraph 96)

26.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. (Paragraph 104)

27.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. (Paragraph 105)

28.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. (Paragraph 106)

29.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. (Paragraph 107)

30.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. (Paragraph 108)

31.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. (Paragraph 112)

32.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. (Paragraph 113)

33.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. (Paragraph 117)

34.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. (Paragraph 118)

Published: 21 August 2019