London boroughs tend to set low council tax but receive generous grant funding due to high needs assessments.
This means they will suffer when funding distribution across all English councils is changed in 2020, the think-tank said today as it issued two briefing notes on spending needs and council tax revenues.
The review “seems set to make councils who set low tax rates bear more of the cost themselves”, the IFS said.
“It is also likely to lead to lower spending needs estimates for councils currently assessed to have the highest needs.”
Tony Travers, director of LSE London, likened the fair funding review to “squeezing a balloon”.
He told PF: “There’s a sense of squeezing a balloon in all of this – you move the air around a bit, but you always end up with same amount of air.”
Travers said that, given pressures in large county councils such as Northamptonshire and East Sussex, ministers were likely to be “spooked” into redistributing more money towards them.
He noted that the government’s options when it comes to the fair funding review were “very, very limited” given that the change is being delivered at a time when there is “no extra money for local government”.
The IFS used the example of Westminster Council which sets the lowest Band D rates in England at £415, reducing the revenues it raises itself.
But the council is also assessed as having high spending needs. For instance its assessed spending need per resident for environmental, protective and cultural services is currently 2.5 times the national average.
The IFS suggested that the government change the way council tax revenues are treated to a system where funding is allocated based on how much councils could raise if they all set the same council tax rate.
IFS research economist Neil Amin-Smith said: “Continuing to take account of councils’ actual council tax revenues when redistributing between councils isn’t a viable long-term option.
“Moving back to a system where redistribution takes account of how much councils would raise if they all set the same tax rate would be better, but would create winners and losers.”
David Phillips, associate director at the IFS, said the government should strive for transparency when calculating fair funding.
He said: “The government has made a good start by involving councils in the process.
“But it needs to follow that up by showing clearly how different options will affect different councils, and by designing a system in which the amount of redistribution between councils is as clear as possible.”
MHCLG spokesperson:
“We are providing local authorities with £90.7bn over the next two years to meet the needs of their residents.
“We are also giving them the power to retain the growth in business rates income and are working with local government to develop a funding system for the future based on the needs of different areas.”
Mike O'Donnell, associate director for local government at CIPFA:
“Equalisation is an important consideration in the fair funding process, but it will generate trade-offs in terms of incentivising growth in a particular area.
“And however the pot is divided up, it is important not to lose sight of the fact that there is just not enough money in the system for all the services local government is expected to deliver.”
London Councils spokesperson:
“The research highlights the problems the government faces with regard to how to take into account councils’ ability to raise revenue from council tax, showing why it is in need of fundamental reform and is no longer fit for purpose
“London Councils would urge ministerial judgements over the funding formula to be kept to a minimum, be informed by evidence and above all should be transparent to the sector.”
Jonathan Werran, Localis chief executive:
“There would inevitably be winners and losers from any changes to the funding formula, rendering funding allocations a political choice between shires or inner cities.
“The best we can hope for in the short term is a more transparent system and easier to understand set of rules.”
Paul Carter, chair of the County Councils Network:
“CCN is encouraged by the direction of the review to-date but we must ensure it delivers real fairness for counties.
“In particular, it must recognise the severe demand-led pressures we face from demographic change, learning disabilities and children’s services, and also the additional costs of delivering services in rural areas.”
