A study from the IFS, published yesterday, uses two recent surveys from the Local Government Information Unit and PwC to examine council decision-makers’ views on whether cuts to funding have affected service quality.
The surveys also explore the impact of business rates retention scheme on revenues and incentives.
Researchers from the LGiU questioned 126 councils and found that, despite years of cuts, 89% of respondents said service quality was maintained in their area last year.
However, just one-in-three respondents to PwC’s survey of 84 councils are confident that they can avoid significant reductions in quality over the next three years, falling to one-in-six over the next five years.
The other area covered by the survey is business rates retention, which currently lets councils keep up to 50% of growth in local business rates revenues and was introduced in 2013.
In 2015, the government said it intended to move to 100% business rate retention by 2020 and this month the Department for Communities and Local Government extended the pilot schemes for the policy.
But the survey reveals that two-thirds of respondents to PwC feel unable to ascertain whether their council has gained or lost financially from the business rates retention scheme.
The report states: “This may be because they are unsure what the funding system would otherwise have looked like, or be caused by the complexities of the scheme.
“A lack of understanding and information about business rates performance could make it difficult for local stakeholders to hold their councils to account, thereby blunting the intended incentives for growth the scheme was designed to create.”
Some 40% of respondents to the LGiU survey expect that 100% retention would incentivise local economic growth, but only 23% expect that their council would gain financially from such a policy.
The survey also found that Labour-controlled councils aremore likely to prioritise redistribution (87%) over incentives for revenue growth (13%), whereas respondents from Conservative-controlled councils are roughly evenly split.
According to the IFS, this could be driven by the fact that Labour-controlled councils tend to have higher spending needs and may expect to win from fuller and more frequent periodic redistribution of revenue growth.
However the think-tank states: “These systematic differences in preferences suggest it could be difficult to design a 100% [business rates retention scheme] that can command support across the political and socio-economic spectrum.”
Jonathan Carr-West, chief executive, LGiU, said: “Councils currently have little certainty as to how they will be funded beyond 2020.
“The impact of 100% business rate retention looks increasingly uncertain. For councils, who have been told in recent years that they should be investing in their local economy so that they will be able to fund themselves through business rates post-2020, the current lack of policy direction adds yet another layer of uncertainty and complexity to their financial planning.”
Carr-West said there is now an opportunity to rethink how the UK can broaden its local tax base to create a sustainable way of funding public services in the long-term. He suggested turning to “creative approaches” to fiscal devolution.
PwC partner Jonathan House, said: “Leaders in local government will need to be particularly alert to how a shift to 100% business rates retention will impact on local economic growth and on their plans to reform public services.
“Councils have proved their resilience and ability to deal with the challenges they are faced with. As they look to the future, they will need to find new ways to innovate and invest in drivers of growth, all in the face of continued uncertainty.”
Concerns have been expressed that greater business rate retention for councils has been sidelined after the Conservatives failed to win a majority in the general election. Legislation to enact local government finance reform was absent from the Queen’s Speech.
