Counties and mets biggest losers in shift away from local government grant

26 Oct 16

County and metropolitan councils have been the biggest losers from the switch away from grants to 50% local business rates retention, according to Institute for Fiscal Studies research for the Local Government Finance and Devolution Consortium.

The study found 119 councils – most of them county or metropolitan authorities – had lost up to 2% of funding because of this change.

Conversely, there were 52 councils, mostly districts, expected to benefit from the change with funding increasing by 5% or more.

It also found that the poorest councils had in recent years suffered under a grant distribution system that lacked consistency and transparency.

The IFS compared the figures under the current partial retention system with what councils would have received if business rates were pooled and the amounts received increased in line with their national growth.

This research came as councils prepare for the expected move in 2020 to 100% local retention of business rates revenue and an end to the grant system.

In its report for the consortium, A Time of Revolution: British local government finance in the 2010s, the IFS also found the grant system in the early part of this decade had penalised poorer areas, which now stood to further lose out from full business rates retention system.

This is because councils would become much more dependent on the amount of council tax and business rates raised locally as the grant system ended.

Full retention would provide a stronger financial incentive to encourage economic growth but also bring more budgetary risk, since both gains and losses would become potentially greater.

The IFS warned that greater funding divergence between those more and less successful in attracting businesses could lead to similar divergence in council service quality.

Report author David Phillips said:  “The changes...will be truly revolutionary. We will have moved from a system where equalisation and insurance was paramount, to one with much more emphasis on incentives for growth, but also more financial risk for councils.”

CIPFA director of local government Sean Nolan said: “CIPFA agrees with and supports the Institute of Fiscal Studies’ assessment of the state of local government finances.

“Against a backdrop of turbulent economic uncertainty and having already weathered six years of ‘austerity’ cuts, councils across England are now in the process of managing tectonic fiscal reforms, while continuing to delivery day-to-day public services.”

Nolan said full business rate retention “comes with a number of short-term challenges [which] must be foremost during the negotiation process”.

These would include managing the differences between councils with stronger and weaker business rate bases and determining an acceptable level of divergence in their spending power.

The report also looked at councils’ budgets since 2009–10 and found that in England, excluding education, they planned to spend around 22% less on service provision in 2016–17 than in 2009–10. Cuts in Scotland and Wales have been smaller, at 15% and 11.5% respectively.

Poorer areas in England more dependent on the grant system – and so most likely to struggle under business rate retention – had seen much larger cuts than their more prosperous counterparts, which could more readily raise money from council tax.

Among the tenth of councils most grant-dependent, services spending had fallen by 33%, compared with 9% among tenth least reliant on grant.

“This pattern arose directly from the way central government allocated grants,” the report said, concluding “tweaks made between 2011-12 and 2013-14, which were supposedly intended to mitigate this, were largely ineffective [and] overall this period was characterised by a lack of consistency and transparency in the allocation of funding to councils, and outcomes that were sometimes at odds with stated intentions of protecting poorer councils”.

Reforms this year to the grant formula would deliver “much more equal cuts to overall spending power across councils”, it added.

The consortium is supported by Capita, CIPFA, the Economic and Social Research Council, PwC and a number of local authorities.

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