No change for local government funding losers

6 Mar 15
David Innes & Gemma Tetlow

Council spending cuts have varied markedly across England, with the most deprived areas and those with rapidly growing populations bearing the brunt. It’s a pattern that looks set to continue.

Central government grants to English local authorities have been cut by more than a third in real terms since 2009/10, helping to deliver part of the overall cut to public spending over this parliament. This sharp fall in local authorities’ spending power has led to councils implementing large spending cuts, and has presented them with tough choices about how to spread these across service areas.

Council spending on services in England fell by a fifth between 2009/10 and 2014/15, after accounting for economy-wide inflation. The measure of spending used here excludes education spending, since this takes place mostly (and increasingly) outside local control, and also excludes the additional responsibilities for public health and social care that local governments were given during the period. This cut is roughly the same size as the cuts seen on average by non-protected Whitehall departments – that is, those outside the NHS, schools and overseas aid. Taking account of population growth, the cuts to spending per person by local authorities were 23% in real terms.

Some local authorities have seen much greater spending cuts than others. Westminster saw a cut to spending per person of 46%, compared to a cut of 6% seen by North East Lincolnshire. Generally, it is areas with least local revenue raising capacity, the highest levels of deprivation and the highest population growth that have seen the largest cuts to spending per person. Regionally, the largest cuts were seen in London, the North West and the North East.

Why have local authorities seen such different sized cuts? Local governments fund service spending through a mix of council tax and central government grants, but the relative importance of each component differs across councils. Council tax revenues per person declined only slightly, while central government grants were cut by 39% per person. This provides one reason that councils least able to raise revenues locally have been hit hardest.

In reality not all councils saw the same cuts to their grants, but the size of the cut to grants was not related to the councils’ revenue-raising capacity or level of deprivation. In other words, the most deprived local authorities on average saw the same percentage cut to grants as the least deprived, but – because they tended to have less capacity to raise revenues through council tax – this led to a much higher percentage cut to their overall spending power.

Local authorities have been faced with the difficult task of deciding how to allocate these cuts across the services they are responsible for. By far their largest area of spending (excluding education) is social care (including both adult social care and children’s and families’ services), which nearly all councils chose to protect from the brunt of cuts. Social care spending per person in England was cut by 17%. But this relative protection for social care means larger spending cuts elsewhere: transport, housing, culture, library, regulation and safety spending were all cut by more than a third, while planning and development spending fell by more than half.

The difficult decisions facing local governments are not diminishing. Local government minister Kris Hopkins recently confirmed that councils in England face a further cut to revenues per person of 4.1% in 2015/16, and all three main UK political parties’ spending plans imply further spending cuts in the next parliament, from which local government spending is unlikely to emerge unscathed.

Many of the local authorities that have seen the largest cuts to spending over the last five years are also likely to be those that see the largest cuts over the coming years. A new system of grant allocation introduced in 2013 applies the same percentage cut to the core grant funding for all local authorities. If kept in place it would mean that authorities with least revenue raising capacity would continue to see the greatest cuts to their overall spending power. The planned cuts in 2015/16 range from a cut of 9.5% in Hackney to an increase of 0.2% in Windsor and Maidenhead.

What policies could the next government consider to ease the burden on councils? One policy that might help local authorities cope with the cut to grants would be to loosen the cap (which has been set at 2% in recent years) on increases in council tax rates that a council can apply without a local referendum. Yet this policy would be of least benefit to the councils facing the greatest cuts. Ensuring future spending cuts are more evenly distributed across councils – taking account of their local revenue raising capacity – would require more fundamental reform to the way central government grants are allocated.

David Innes is a research economist and Gemma Tetlow is a programme director at the Institute for Fiscal Studies. Their briefing note can be read here.

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