By Richard Johnstone | 9 May 2013
Reforms to local government finance mean councils will be increasingly dependent on economic growth to fund services, which could put further pressure on areas such as adult social care, the Centre for Cities warned today.
Changes such as the part-devolution of business rates, Housing Revenue Account self-financing and localisation of council tax benefit support schemes had ‘increased the portion of local government budgets that was locally raised and retained’, the think-tank report said.
However, as all these were affected by and dependent on local economic growth, councils also bore more financial risks, according to Ways and Means.
In particular, it said, business rate income could be volatile, with the loss of one large local firm potentially leading to a large reduction in business rates. Other local government revenue streams also depended on growth and development, including the New Homes Bonus for new homes and the Community Infrastructure Levy paid on developments, the report added.
As a result of this, councils need to be more focused on supporting economic development to ensure that funding for local services could be maintained. ‘Greater proportions of funding will come from local residents and businesses in the future, and increasing local government budgets will be more predicated on economic growth in places,’ the report stated.
‘Thus, now more than ever, local government is challenged with finding the right balance between spending on social care and spending on economic development that will support future growth and, ultimately, future budget growth.’
But many councils would struggle to respond as they still lacked sufficient control over policy areas that could boost their local economy. This meant budgets could fall further in the years ahead, potentially putting the provision of public services in jeopardy.
Centre for Cities said there was a need for further reforms to avoid the ‘precarious position’ of councils having more responsibility for their local finances but not the tools needed to grow them.
For example, town halls should be given greater control over transport, housing and skills spending in their areas. Former deputy prime minister Lord Heseltine’s plan for a single local growth pot should be implemented in full.
Chief executive Alexandra Jones said cities are ‘currently at risk of being trapped in a halfway house when it comes to local government reform’.
She added: ‘Despite being critical to the government’s growth strategy, cities do not yet have all the freedoms and flexibilities they require in order to drive growth and raise revenue at a time when public funding for local government is being squeezed.
‘If the size of cities’ budgets is increasingly going to depend on the performance of their local economy, then they need far greater control to shape their economies, and discretion to take decisions over how money in their area is invested. This will allow them to prioritise initiatives that will make a real difference to the local economy, increasing council revenues, and thus boosting the amount they can spend on local services.’