The pressure on local government: the chancellor has room to respond

2 Sep 15

If the forthcoming government Spending Review was able to protect three key areas of local government funding, councils would be better placed to respond to a range of cost pressures

In a new report, the Local Government Association has set out in stark detail the cost pressures piling onto town halls across England and Wales.

Cumulatively, the LGA estimate the councils will face cost pressures totalling £9.9bn by 2019/20, the last year covered by the upcoming Spending Review. Some are the result of inflation and changing demographics, others are a direct result of central government policy, such as the decision in the recent Summer budget to cut social sector rents by 1% a year.

Local government has already faced half a decade of shrinking resources. Over the 2010 Spending Review period, government grants to local authorities (outside of schools, emergency services and housing benefit) fell by over a third in real terms. While their income from council tax rose slightly, they nevertheless had to cut spending by 20.4 per cent from 2010/11 to 2014/15.

Not all areas of local spending fared equally. Some areas, such as social care, were relatively protected – local government spending on social care fell by around 4 per cent between 2010/11 and 2015/16. Others, such as housing services, saw cuts of over a third.

Looking ahead to the upcoming Spending Review period, we may see a similar pattern. IPPR have analysed the fiscal choices facing the government, in a report published this week. We found that, under the government’s fiscal trajectory set out at the Summer 2015 budget, central government current spending – outside of the protected areas of schools, the NHS, international aid and the Ministry of Defence and the devolved nations – must fall by an average of 26.5% in real terms between 2015/16 and 2019/20. This is in line with the average cut seen over the 2010 Spending Review period.

While there may be a similar-sized fall in the value of central grants to local government, there is reason to believe the average cut in grants will be larger. As noted above, over the 2010 Spending Review period, local government fared worse than the average and the OBR’s relatively healthy forecast for council tax and retained business rate income may encourage ministers to continue this trend.

We estimate that, if grants are cut by an average of 40%, councils would need to reduce their funding for services by around 12% in real terms by 2019/20. If grants are cut by an average of 60%, this would increase to 20%. The picture for councils that rely more heavily on government grants, such as London boroughs and other metropolitan authorities, will be even worse.

This is especially concerning given the cost pressures uncovered by the LGA. Take social care. A perfect storm of demographic change and the introduction of the National Living wage mean councils face rapidly rising costs for delivering social care. In order to meet these costs while reducing overall spending, councils will either need to drastically cut spending on other services in order to fund social care, or cut back on the level of social care provision offered.

So what should the chancellor do? In our paper, we argue that local government cannot weather another four years of cuts on a similar scale to that seen in the last parliament. Instead, the government should protect key grants to local authorities in cash terms. If the Public Health Grant, Revenue Support Grant and the Better Care Fund (or an equivalent amount) were protected in this way over the Spending Review period, it would afford local government the resources to meet rising costs in key areas without having to cut too deeply elsewhere. For example, we estimate that this settlement would allow local government to deal with inflation and demographic pressure in social care with a much-reduced cut in other service spending of around 6%. This would still be a tough settlement for local government, but would ease the pace of cuts required substantially.

This may sound like unlikely, but the truth is the chancellor’s fiscal rules offer room for manoeuvre in order to fund greater spending in key areas. As shown in recent years and at the recent Summer Budget, the chancellor is willing to adjust the pace of deficit reduction and raise revenue through tax in order to pay for higher departmental spending. The outlook for local government is extremely tough, justifying a more generous settlement of this kind in the upcoming Spending Review.

  • Spencer Thompson

    senior economic analyst at the Institute for Public Policy Research. He tweets at @SThompson20

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