Council funding: will it all come out in the wash?

24 Jun 13

Local government anxiously awaits the outcome of the Spending Review. But it's not just the overall totals that count, it's also the fairness of the distribution system - and poorer councils are already at a disadvantage

Whether it’s a 10, 11 or 12% cut for local government announced in the Spending Review on Wednesday, the devil will be in the detail for local authorities in the poorest areas of the country.

Beyond the headlines, final decisions on priorities within departmental budgets will be made in what’s referred to as the ‘wash up’ after the announcement. Local authorities know that it has been the funding mechanisms that have often hit as hard as overall quantum changes to budget.

In recent years, the combined impact of the changes in government funding has resulted in the poorest suffering while others gain, and the full impact of these changes is only now beginning to emerge.

At the Special Interest Group of Municipal Authorities (Sigoma), which represents 45 of the most deprived urban authorities outside of London, we have published a report, A Fair Future?, that analyses the true impact of past, present and future cuts across local government. This is the backdrop in which we interpret the true consequences of the Chancellor’s headline figures.

The government’s agenda for growth is built upon a model of rewarding local authorities that display the ability to grow their economies. However, there are not adequate safeguards in place to help lift the weakest economies out of the poverty spiral, nor is there evidence yet that the new funding mechanisms offer incentives to affect local priorities.

Formula grant, the main source of local authority funding, disappeared this year and with it went the link between funding and service need. It was replaced by a combination of support grant and locally retained rates, neither responsive to changes in demands for services nor local demographics.

The New Homes Bonus scheme rewards councils that encourage and enable new builds in their areas. However, the funding for this has been taken from a grant that was previously allocated according to levels of need. According to estimates, authorities in the Sigoma group lose 11.8% of funding as a result, while those in the South East gain 7.3%. This imbalance was surely no surprise to the architects of the policy.

The business rates retention mechanism itself is funded by grants that were previously allocated according to need. Authorities become dependent on the growth in business rates raised locally. Weaker economies, which are less able to increase their business rates in line with government estimates, will lose out. Estimates suggest that Sigoma authorities lose out by 1.5 times the national rate.

Council tax support is now the responsibility of councils, which must devise their own local schemes paid for by a fixed grant from government. The grant was cut by 11.4% in cash terms which, when passed onto working-age claimants, equates to between 16% and 20% per claimant.

For poor authorities with a high number of claimants, the cut represents a much greater proportion of council budgets than in more prosperous areas. In Liverpool, the cut represents over 3% of council tax requirement, whilst to Wokingham the cut is less than 0.75%.

Welfare reform will hit the poorest hardest. Estimates of the consequences of welfare reform by Sheffield Hallam University showed wide variations across the country. In the North West the loss per head by 2014-15 is estimated at £560, whilst in the South East it is £370.

The collective impact of these inequalities amount to a difference of more than £900 between the winners and losers. This inequality was recognised earlier this month by the Public Accounts Committee.

Put simply, the current course of implementing cuts is not sustainable without risking failure in service delivery for the most vulnerable in society. This was the message from council leaders who, in an open letter last week, warned that local government risks becoming unsustainable if further cuts are introduced in the spending review.

On Wednesday we will receive the headline figure for cuts to vital services. Whatever funding remains, it is vital for the sustainability of the poorest areas that it is distributed fairly across the country.

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