14.In the past 10 years, successive Governments have altered the way local government in England is funded. The overall effect has been to reduce the amount of funding from the centre, in the form of central grants, and increase councils’ reliance on locally generated revenue, such as retained business rates, council tax and commercial revenue. This policy of making local government more self-sufficient has encouraged many councils to offset funding reductions by generating alternative revenue streams or by growing business rates in their area. We support this policy objective in principle and believe that devolving even more revenue-raising powers to local government could improve its financial sustainability, as our predecessor Committee concluded, in its report, Local government finance and the 2019 Spending Review. This principle must take into account the varying abilities of local authorities to raise revenue. As we note in this report, with the devolution of such powers could also come greater control over how councils spend their money. Indeed, this aligns with the position of our predecessor Committee who, in the aforementioned report, expressed support for policies which allow local government to have more control of the revenue it raises and how it is spent. We also note, however, that this greater emphasis on locally derived income has affected the financial resilience of authorities less able to raise revenue locally. In this chapter, we explore each of these issues in turn and suggest ways in which the local authority funding model could be reformed.
15.Introduced in 2013, the BRRS is the third largest source of local government funding. It is also the principal mechanism by which central government seeks to equalise funding. Under the BRRS, local authorities retain 50% of business rates (the local share) and give 50% to central government (the central share). A system of tariffs and top-ups is then applied to each local share. Each authority either receives a top-up or pays a tariff, as determined by the difference between its “business rates baseline” (its average local share in 2011–12 and 2012–13) and its “baseline funding level” (the amount the Government believes it needs from business rates to deliver local services, as assessed in 2013). It follows that whether an authority is a tariff or a top-up authority, and the size of its tariff or top-up, is fixed and will remain so until each authority’s business rates baseline is reset. In addition, each authority’s 50% share of “additional business rates revenue” (anything over the “business rates baseline”), known as “retained growth”, is itself subject to a levy of between 0% and 50%. The purpose of this is to redistribute revenue away from councils that benefit disproportionately from business rates growth.
16.Before the introduction of the BRRS, funding to local government was partially equalised through the distribution of formula grants based on an assessment of councils’ relative needs and ability to raise revenue locally, and these grants were funded from the total amount of business rates collected nationally. The BRRS has reduced the amount distributed in this way by halving the pot of money (the central share) from which central grants are funded and making the other half contingent on a council’s ability to grow its business rates. The DCN told us this emphasis on locally derived revenue had resulted in many councils growing their local economies and increasing their local tax base. Broadland District Council and South Norfolk Council told us they had responded to reductions in central funding by growing their local economies and thereby benefitting from business rates retention.
17.We were also told, however, that despite the partial redistribution of retained rates, the BRRS, by explicitly seeking to incentivise business rates growth, had reduced funding to councils with less growth potential. Newcastle City Council argued that the BRRS has benefited wealthier authorities and “resulted in a lower level of available funding to distribute towards needs formulae for deprived councils.” According to Derbyshire County Council, whilst rate retention was “intended to provide local authorities with the incentive to promote economic growth”, there is “no correlation between growth in business rates and the demand for local government services”. Newcastle City Council said the BRRS “should recognise that local areas have different growth potential”.
18.In 2015, the Government said it would allow councils to retain 100% of business rates, although this was revised down to 75% in 2017. Originally, the roll out to 75% retention was to begin in 2020–21, but this was postponed for a year in 2019 and then again in 2020 following the outbreak of the covid-19 pandemic. It is now due to be rolled out in April 2022. Since the central share of business rates funds the Revenue Support Grant (RSG), the Government has said that allowing councils to retain more rates will result in a corresponding reduction in the RSG. In fact, it intends to abolish the RSG altogether when 75% retention is rolled out.
19.Councils’ support for 75% retention was tempered by concern about the corresponding further reduction in the RSG and the consequent impact on the overall distribution of funds. Sheffield City Council warned that its expansion had “the potential to put further pressure on local authorities”. For this reason, it was argued that further rates retention should happen only if it means a net increase in core funding. The DCN said it should not be predicated on reductions in, let alone the abolition of, the RSG. This chimes with the findings of our predecessor Committee’s 2018 report, Business rates retention, which said local government “should be allowed to use the additional revenue gained from 75 per cent retention to fund existing cost pressures” and that there should be no corresponding cuts to the RSG.
20.On the introduction of the BRRS, it was envisaged that councils’ business rates baselines would be “reset” in 2020. A reset would involve each council’s local share being recalculated on the basis of its current percentage share of overall rates revenue, rather than its share in 2011–12 and 2012–13. The purpose of a reset is to stop councils gaining or losing disproportionately over time according to their ability to grow their rates revenue. Like the extension of 75% retention, the reset has been twice delayed and is now also due to be implemented in April 2022. Closely related to the reset is the review of the underlying assessment of need, known as the Fair Funding Review, the purpose of which is to allocate new baseline funding levels to each council according to the demand for services in its areas, as well as other factors, including economic deprivation. Launched in 2016, the review was due to be implemented in 2020, but this too was postponed for one year in 2019 and then again in 2020 at the beginning of the covid-19 pandemic. Its implementation is due to coincide with the reset and 75% retention.
21.We were told about the impact the delays to the reset and Fair Funding Review were having on some councils’ finances. SIGOMA said the failure to reset business rates was having a disproportionate impact on its member councils. Despite the partial redistribution of additional revenue away from councils that see disproportionate growth, it said that in 2020–21 alone about £1.8 billion had remained with councils and that this had disadvantaged its members. Sir Stephen Houghton, Chair of SIGOMA, said the time had come “for the Government to honour their promise and reset the business rates system.” Dan Bates, an accountant and local government finance specialist, agreed that the redistribution of business rates growth “tends to be inequitable”. In contrast, the DCN expressed concern that a reset could penalise those councils “who have worked tirelessly to grow their local economies”. The tension in the evidence is inherent in the BRRS itself. Its purpose is to incentivise councils to grow business rates in their area, and too frequent resets would diminish the incentive, but the longer the period between resets the greater the detriment to councils that, for whatever reason, have been unable to grow rates in their area. As our predecessor Committee concluded in its report, Local government finance and the 2019 Spending Review, “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.”
22.We were told the Government also needed to implement the Fair Funding Review as soon as possible, though most understood the Government’s reasons for the further postponement. Derbyshire County Council said it had “dragged on now for a number of years” and still local government was “no further forward in understanding what the funding landscape will look like.” The Society of County Treasurers said the delay had “led to a further gap between funding for local authorities and their needs”. Core Cities also called on the Government to “resume the Fair Funding Review” but “with a guarantee that the transitional mechanisms will not only ensure that no councils experience a loss of income but also protect councils from reductions so that they can plan with confidence with a future three-year settlement.” The LGA echoed this concern.
23.The Minister told us the Government had delayed the review in response to the pandemic and that “the vast majority of councils” had agreed with that decision, as neither they nor the Government had the “bandwidth” to give it sufficient attention. He said the Government would “let the dust settle after the pandemic” but assured us that reform remained “a clear policy commitment”, as neither he nor the Secretary of State considered the current distribution mechanism to be the “fairest way to distribute resources”. The Government wanted to first understand “the longer-term covid scarring impacts” on local government before bringing forward the review, “probably in the context of a forward spending review”.
24.We agree with the principle of incentivising councils to grow business rates in their area, as a means of making them less reliant on central funding, but we are concerned about the impact on councils that, through no fault of their own, are less able to do this. As our predecessor Committee concluded, the Business Rates Retention Scheme is too complex in seeking to both incentivise growth and redistribute funding according to need. We are reassured that the Government remains committed to implementing the Fair Funding Review, which, along with the business rates “reset”, could partly restore the link between funding and need, but in the long term we do not see how the BRRS can be the most sensible means of matching funding to need.
25.The question of the BRRS is closely related to the debate about the longstanding role of equalisation in how local government in England is funded. Whilst the purpose of equalisation is to ensure fairness between councils, there is little agreement on the appropriate level: 100% equalisation would provide local authorities with no incentive to build up their tax base, whereas no equalisation would leave some councils chronically underfunded through no fault of their own. The system of local government finance should both enable councils to increase revenue by growing their tax base and protect those in more deprived areas. Rules about equalisation need to be transparent, comprehensible and predictable.
26.We recommend that the Government implement the Fair Funding Review and business rates reset as soon as possible, as the quickest way of partly restoring the link between funding and need. The Government should also allow councils to retain 75% of business rates from 2022, but so that this represents a net increase in funding, we urge it not to impose commensurate cuts to grant funding. The additional funding should then be put towards equalisation in a separate grant designed for this purpose. We also urge the Government to clarify what level of funding equalisation it considers to be appropriate for local government.
27.As grant funding has fallen, so the proportion of local government funding derived from council tax has risen. In 2009, council tax accounted for 40% of councils’ revenue. By 2018–19, that figure was 52%. This trend is set to continue following the latest financial settlement. Of the projected increase in local government core funding of £2.2 billion, £1.9 billion is predicated on councils raising council tax rates, including the social care precept, by the maximum allowable, meaning the proportion of funding derived from council tax could be 61% in 2021–22.
28.As councils have come to depend more on council tax, so the funding model for local government has become increasingly regressive. This is because, as our predecessor Committee concluded in its report, Local government finance and the 2019 Spending Review, council tax itself is regressive, with rates still based on property values as assessed in 1991, even though values have changed significantly since then and at different rates across the country. It is estimated, for example, that in 2020 the average property in London was worth more than six times what it had been in 1995, whereas in the north-east that figure was barely three times what it had been. In 2019, the Institute for Fiscal Studies (IFS) calculated that, even after accounting for council tax support, which reduces council tax liabilities for low-income families, the poorest tenth of the population pay 8% of their income in council tax, while the next 50% pay 4–5% and the richest 40% pay 2–3%. In response to these concerns, some are now calling on the Government to replace council tax completely with a proportional property tax.
29.If council tax is to be retained, we were told it should be based on contemporary property values and that council tax bands should be extended. Our predecessor Committee’s 2019 report recommended that the Government consider adding extra council tax bands at the top and bottom and “hold a review into how a revaluation could be implemented without dramatic increases for individual households.” We note, too, that in its recent report, Tax after coronavirus, the Treasury Select Committee recommended that the Government reform council tax in line with our predecessor Committee’s recommendations. As recent research by the IFS has identified, however, under a reformed council tax some councils in more deprived areas could end up losing revenue.
30.Perhaps more importantly, the overreliance on council tax is unfair on more deprived areas as the ability to raise income this way bears no relation to need and raises less in more deprived areas. There is, as SIGOMA explained, “a clear and widening gap that exists, between councils with relatively low demand for services and high … tax bases compared to councils with high service demand and relatively low council tax and business rates.” Derbyshire County Council explained that authorities had “long argued the distributional impacts” and that “authorities in the more affluent areas” could “raise substantially more through council tax income compared to authorities in those deprived areas.” We note, however, that, in the short term at least, the distributional unfairness of the council tax increases in this year’s financial settlement has been mostly neutralised by the targeting of the £300 million grant for social care towards councils with lower council tax bases.
31.We are pleased that the allocation of the £300 million grant for social care mitigates the distributional impact of the council tax rises, but we do not think the fairness of the funding model should be reliant on one-off, short-term grants. It is right that certain councils be compensated for low council tax bases, but this should be done through a more predictable means of funding equalisation. Council tax is also an increasingly regressive tax that again penalises those in more deprived areas. A revaluation is long overdue. In the longer term, one possibility that could be considered is a proportional property tax.
32.The Government should reform council tax by undertaking a revaluation of properties and introducing additional council tax bands, in line with the recommendations of our predecessor Committee. In the longer term, the Government should consider options for wider reform of council tax and business rates, including possibly replacing them with a proportional property tax.
33.We heard that local government in England relied on a much narrower tax base than its counterparts overseas. As a result, there is concern about the sustainability of funding, especially in the light of the covid-19 pandemic, which has drastically reduced revenue from council tax and business rates. CIPFA said covid-19 had “exposed the weaknesses of these limited funding sources” and that in the future “the funding system may need to look very different.” Researchers from Nottingham Business School said that “to generate long-term stability” the Government should “introduce a longer-term, more fundamental change to local government finance arrangements”. Richard Watts said council tax had “been used as a tactical device” because it was “easily available” but that it was “not the right long-term solution” and that the public would “only stomach twice-inflation council tax rises for so long.” For these reasons, much of the evidence warned that a more fundamental overhaul of the funding model was the only way to restore local government financial resilience.
34.One way the Government could widen the revenue base of local government is by giving councils greater flexibility to raise money through local taxes and other charging mechanisms. As our predecessor Committee concluded, “[d]evolution of more responsibilities and revenue-raising powers to local government has the potential to improve the financial sustainability of the sector”. London Councils asked for “a broader range of revenue raising powers and flexibilities, rather than being too dependent on one particular tax.” The County Councils Network (CCN) said councils needed “greater freedom to determine their own financial response to financial challenges” and called for a “full range of fiscal devolution measures that will widen the options open to councils and also give them greater freedom to influence economic activity in their areas.” The CCN and DCN called for council tax referendums to be scrapped. The DCN called for councils to be given more control over business taxes and raised a specific concern about the ability of second-home owners to register their domestic properties for business rates, rather than council tax, and then claim 100% small business rates relief, thereby denying councils any revenue at all. As the Society of County Treasurers noted, however, giving councils more “control over local tax raising ability”, though helpful, “both locally and nationally may not be deemed acceptable in all cases.”
35.Our predecessor Committee’s report, High streets and town centres in 2030, recommended that the Government consider reforming business rates by finding a way of taxing online retailers. We heard again that such a tax, as well as being fairer, could help to make local government finances more secure. Norfolk County Council called on the Government “to address fundamental issues in the business rates system including the under-taxation of online retailers” and noted that “traditional ‘bricks and mortar’ businesses bear a disproportionate share of the burden.” It thought the tax base was “arguably overly dependent on a relatively small number of businesses and places” and that this resulted in “much greater risk, volatility and fragility within the system.” Core Cities UK, Central London Forward and London Councils all agreed that reform of business rates should include a mechanism for taxing online sales and that this would make revenue more sustainable. We will explore possible reforms to business rates in more detail in our upcoming report on supporting our high streets after covid-19.
36.The funding base of local government in England is very narrow. As the pandemic has highlighted, revenue derived from council tax and business rates is also insecure. As concluded by our predecessor Committee, greater fiscal autonomy could contribute to local government financial resilience.
37.We recommend that the Government widen the funding base of local government to make it less vulnerable to shocks such as the covid-19 pandemic, including by giving councils more flexibility over local taxes and other revenue-raising powers. This would also align with giving local authorities more powers over spending, which we will consider in our future report on devolution in England. Giving local government more powers to raise and spend money is a position supported by our predecessor Committee. We also recommend that the Government reform business rates, in particular by finding a mechanism by which to level the playing field between bricks-and-mortar and online retailers. This is an issue we will return to in our upcoming report on supporting high streets after covid-19.
38.In response to the pandemic, the Government resorted last year to a one-year spending review. This followed the one-year spending round in 2019. This means local government has not had a multi-year financial settlement since 2015. On few points was there as much agreement in our evidence as on the importance of multi-year spending reviews and financial settlements. Richard Watts told us that a four-year funding settlement would be “vital if we are going to have some sort of sound basis to plan for the future.” London Councils told us the long-term funding issues had been aggravated by the Government’s short-term approach to funding settlements and called on the Government to deliver a multi-year spending review that “provides sufficient resources to stabilise the sector”. As CIPFA explained, “longer-term planning and greater financial certainty improves financial sustainability and resilience in the public sector” while “one-off grants and single-year spending reviews do not provide a foundation for confidence.”
39.When pressed on this point, the Minister acknowledged the “universal view from local government that multi-year settlements are preferable” and “the importance of that to councils when planning and setting budget support planning.” Having explained it would “take time for the dust to settle”, however, he then concluded: “I hope that, when we come to the settlement next year, it will be a multi-year one. I understand that that is the hope of the Chancellor as well, but he will set out his plans for spending reviews in the usual way in due course.”
40.In its 2018 report, Financial sustainability of local councils, the NAO found that local government funding since 2015 had been “characterised by one-off and short-term funding streams and initiatives, often introduced at relatively short notice.” The previous Public Accounts Committee (PAC) came to the same conclusion in its 2019 report, Local government spending, and noted that such funding arrangements do not represent value for money. We heard the Government’s habit of delivering central funding through these small and sometimes ring-fenced grants, often involving competitive bidding processes, rather than through the RSG, was impeding their ability to set budgets. They are generally less predictable and, where they involve a bidding process, can be a drain on councils’ time and resources. Ring-fenced grants also reduce councils’ ability to decide for themselves how to spend their money. The LGA told us councils needed the ability to plan financially without the “added burden of navigating a complex and fragmented funding landscape”. The Society of County Treasurers said the Government’s policy of funding social care through “one-off or time-bound grants” was undermining councils’ “ability to address the large funding gap that each year is resulting in overspends and draws from reserves, which in itself hampers longer term planning further.” The DCN criticised “the plethora of short-term and one-off grant funding” and suggested that they all be rolled into the RSG. It also said that the “bureaucratic bidding processes”, rather than matching funding to need, rewarded “authorities with the capabilities for writing bids”.
41.In his speech to the LGA’s 2021 annual conference, the Secretary of State for Housing, Communities and Local Government, Rt Hon. Robert Jenrick MP, referred to the Levelling Up Fund and Community Renewal Fund, and acknowledged “that these funds bring challenges to local councils” and said he wanted “to ensure there are fewer competitions in the future” and “more consolidated opportunities to access government funding”.
42.We understand the Government’s reasons for resorting to a one-year spending review last year, but we note it followed a one-year spending review in 2019 and that the last multi-year spending review came in 2015. Local government cannot manage its spending and borrowing without the medium-term certainty that multi-year funding settlements bring. If the next spending review is not a multi-year settlement, the recovery of local authority finances after the covid-19 pandemic will be impeded. We are pleased that the Minister acknowledged the importance of multi-year settlements to local government but note he expressed only the hope that the next one would be a multi-year settlement.
43.The proliferation in recent years of small, often one-off and ring-fenced grants, sometimes involving a competitive bidding process, and the uncertainty around such funding, can hinder robust financial planning and management by local authorities, as has been acknowledged by the Public Accounts Committee. Ring-fenced grants also limit councils’ flexibility to match spending to need. Reducing their number would give councils greater control over spending and would be consistent with our previous recommendation that councils be given great revenue-raising powers.
44.The next financial settlement for local government must be a multi-year settlement. The Government should also consolidate the number of small and ring-fenced grants, which can limit local authorities’ ability to provide services flexibly, and should reduce the number of bidding processes, which can be burdensome and time consuming.
21 Institute for Fiscal Studies, , (November 2019), p. 6
22 For one example of a previous Government’s stated commitment to making local government self-sufficient, see: Department for Communities and Local Government, , (July 2016)
23 Housing, Communities and Local Government Committee, Eighteenth Report of Session 2017–19, , HC 2036, para 118
24 Housing, Communities and Local Government Committee, Eighteenth Report of Session 2017–19, , HC 2036, para 63
25 Department of Communities and Local Government, , (2013)
26 Department for Communities and Local Government, , (2013), para 6
27 District Councils Network ()
28 Broadland District Council, South Norfolk Council ()
29 Newcastle City Council ()
30 Derbyshire County Council ()
31 Newcastle City Council ()
32 Department for Communities and Local Government, , (July 2016)
33 Sheffield City Council ()
34 District Councils Network ()
35 Housing Communities and Local Government Committee, Fifth Report of Session 2017–19, , (April 2018), para 22
36 MHCLG, , (December 2018); Reviewing and reforming local government finance, Standard Note , House of Commons Library, 3 August 2020
37 Special Interest Group of Municipal Authorities ()
39 Mr Dan Bates (Director at OnTor Limited (Private Limited Company)) ()
40 District Councils Network ()
41 Housing, Communities and Local Government Committee, Eighteenth Report of Session 2017–19, , HC 2036, para 63
42 County Councils Network (); London Councils (); Core Cities UK (); Local Government Association (LGA) ();
43 Derbyshire County Council ()
44 Society of County Treasurers ()
45 Core Cities UK ()
46 Local Government Association (LGA) ()
48 , p. 3
49 Institute for Government, , (March 2020)
50 , p. 3
51 Housing, Communities and Local Government Committee, Eighteenth Report of Session 2017–19, , HC 2036, paras 65–75
52 Institute for Fiscal Studies, , March 2020,
53 Institute for Fiscal Studies,
54 For example, see: Bright Blue, , (2021)
55 Professor Peter Murphy (Professor of Public Policy and Management at Nottingham Business School); Dr Peter Eckersley (Senior Research Fellow at Nottingham Business School); Katarzyna Lakoma (Research Associate at Nottingham Business School); Bernard Kofi Dom (Associate Lecturer at Nottingham Business School) ()
56 Housing, Communities and Local Government Committee, Eighteenth Report of Session 2017–19, , HC 2036, paras 74–75
57 Treasury Committee, Twelfth Report of Session 2019–21, , HC 664, para 208
58 Institute for Fiscal Studies, , (March 2020)
59 Chartered Institute of Public Finance and Accountancy (CIPFA) (); District Councils Network (); Special Interest Group of Municipal Authorities (); Derbyshire County Council (); Mr Pete Carpenter (Corporate Director Resources at Peterborough City Council) (); Core Cities UK (); Professor Peter Murphy (Professor of Public Policy and Management at Nottingham Business School); Dr Peter Eckersley (Senior Research Fellow at Nottingham Business School); Katarzyna Lakoma (Research Associate at Nottingham Business School); Bernard Kofi Dom (Associate Lecturer at Nottingham Business School) (); UK Women’s Budget Group ()
60 SIGOMA ()
61 Derbyshire County Council ()
62 Institute for Fiscal Studies, , (December 2020), p. 7
63 District Councils Network (); Professor Peter Murphy (Professor of Public Policy and Management at Nottingham Business School); Dr Peter Eckersley (Senior Research Fellow at Nottingham Business School); Katarzyna Lakoma (Research Associate at Nottingham Business School); Bernard Kofi Dom (Associate Lecturer at Nottingham Business School) ()
64 London Councils (); Derbyshire County Council (); Chartered Institute of Public Finance and Accountancy (CIPFA) (); Local Government Association (LGA) ()
65 Chartered Institute of Public Finance and Accountancy (CIPFA) ()
66 Professor Peter Murphy (Professor of Public Policy and Management at Nottingham Business School); Dr Peter Eckersley (Senior Research Fellow at Nottingham Business School); Katarzyna Lakoma (Research Associate at Nottingham Business School); Bernard Kofi Dom (Associate Lecturer at Nottingham Business School) ()
68 ; London Councils (); Professor Peter Murphy (Professor of Public Policy and Management at Nottingham Business School); Dr Peter Eckersley (Senior Research Fellow at Nottingham Business School); Katarzyna Lakoma (Research Associate at Nottingham Business School); Bernard Kofi Dom (Associate Lecturer at Nottingham Business School) ()
69 London Councils (); Society of County Treasurers (); County Councils Network (); Core Cities UK (); District Councils Network (); Central London Forward (); Southwark Council ()
70 Housing, Communities and Local Government Committee, Eighteenth Report of Session 2017–19, , HC 2036, para 118
71 London Councils ()
72 County Councils Network ()
73 County Councils Network (); District Councils Network ()
74 District Councils Network ()
75 Society of County Treasurers ()
76 Housing, Communities and Local Government Select Committee, Eleventh Report of Session 2017–19, , HC1010, para 76
77 Norfolk County Council ()
78 Core Cities UK (); London Councils (); Central London Forward ()
79 Norfolk County Council (); Solace (); Special Interest Group of Municipal Authorities (); County Councils Network (); London Councils (); Chartered Institute of Public Finance and Accountancy (CIPFA) (); Core Cities UK (); Society of County Treasurers (); Derbyshire County Council ()
81 London Councils ()
82 Chartered Institute of Public Finance and Accountancy (CIPFA) ()
84 National Audit Office, , (8 March 2018), p. 59
85 Public Accounts Committee, Seventy-Sixth Report of Session 2017–19, , HC 1775, p. 5
86 Local Government Association (LGA) (); London Councils (); District Councils Network (); Society of County Treasurers ()
87 Local Government Association (LGA) ()
88 Society of County Treasurers ()
89 District Councils Network ()