Tomorrow’s local government settlement in England is likely to be a painful experience. There may be opportunities for individual councils to boost business rate income from next year, but the overall spending direction will be downwards at least until the end of the decade
The Autumn Statement is already a distant memory. For many in local government, the next big day is expected tomorrow, when the local government finance settlement is announced. The details of 2013-14’s authority-by-authority position are being keenly awaited – largely because business rate retention starts next April.
Along with their council tax, local authorities will in future keep half of their non-domestic rate (NDR), plus a grant allocation from central government. Because there will be differences between authorities in the size of their business rate yield, there will be a system of ‘tariffs’ [effectively, payments into a pool] and ‘top ups’ [receipts from the pool] to ensure there are no changes in spending power at the start of the new system.
Grants for 2013-14 will continue to be calculated in broadly the same way as in the past, though with a reduction in the total paid to each council in recognition of the amounts they retain in business rate. From 2014-15 onwards, these grants will taper off towards zero so that the overall sum available for local government spending is kept to the total set in the Chancellor’s spending plans.
The reason for reforming the NDR was to give councils an incentive to build up their local tax base. A similar incentive, albeit paid as a grant, is already embodied in the New Homes Bonus (NHB). Taking the NDR and NHB reforms together, local government finance in England is undergoing a profound change. Since the 1960s the grant system has become ever more elaborate in the name of ‘needs’ and ‘resources’ equalisation. In fact, government grants have attempted to equalise between councils in different circumstances since 1948, and even before.
While the equalisation embedded at in the final year of the existing system – 2012-13 – will create the starting-point for each council within the new system of local government finance, it will only be reviewed periodically thereafter. Instead of needs and resources equalisation, the new arrangement will move inexorably away from equalisation and towards the promotion of growth. Authorities that do not grow their NDR and council tax base will lose out.
It is a pity this radical reform is taking place against the backdrop of reducing local government spending. The more that councils collectively increased their total income from NDR and council tax, their spending power would eventually exceed the expenditure limit determined by the Chancellor in his Spending Review.
There would come a point where, taking England as a whole, for every additional £1 generated by local government from growth in their tax base, it would be necessary to take £1 off their grant. Once the grant ran out, the government might need to reduce the share of NDR retained so as to constrain council spending.
Because the government has chosen to increase spending on International Development while protecting the NHS and schools in real terms, expenditure on these services is rising in cash. The cost of welfare continues to increase sharply from year to year. To compensate for the rises in these major items of central government provision, council spending has had to be cut in cash terms. The Autumn Statement confirmed that additional cuts will be made to council funding in 2014-15 so as to allow slightly higher capital investment.
Tomorrow’s local authority funding settlement will be this government’s third. Given the baleful state of the public finances and the continuing likelihood of low economic growth, it is almost certain that councils face a series of punishing settlements from now on. There may in future be incentives for councils to build up their resources by competing for NDR and council tax, but the overall direction of spending will be downwards at least until the end of the decade. And that’s if things go well.
