A proper plan is needed for local government funding

8 Jul 19

Pivotal choices loom on local government funding but if we don’t address what we expect from our councils we risk a system that fails to meet needs, says the IFS’ David Phillips. 

 

Whoever replaces Theresa May as prime minister will need a very large in-tray on their desk at Number 10. Many of the papers they’ll have to read will relate to Brexit, of course.

Others will be about the tax and spending pledges they have made – which already amount to billions of pounds. Eventually though they’ll come across a paper setting out the issues and options for local government funding – or at least they should. After years of muddling along, a proper plan is needed for local government funding, and that plan should be subject to full and frank national debate.

First, we need to decide what services we expect local government to be able to provide, and ensure the funding system is up to providing the resources required. Current plans are for councils to rely on council tax and 75% of business rates for the vast bulk of their funding.

Rising costs and demands mean this is unlikely to be sufficient to maintain current services, let alone improve them. Even with council tax increasing by 3% a year – the most it can without a referendum under current rules if social care precept powers expire next year as planned – adult social care could account for over 60% of these revenues in 15 years’ time; up from around 40% now. Meeting this would require cuts to other council spending.

The upshot is we either need to accept that councils will do less, or provide them with additional sources of funding to top up local tax revenues. This could mean maintaining and increasing grant funding, paid for by national taxation; or devolving additional tax powers and revenues to councils.


'In work earlier this year, myself and colleagues at the Institute for Fiscal Studies argued that if one wanted to go down the route of tax devolution, a local income tax looks the most sensible option, for a range of reasons including administrative feasibility and scope for accountability via the local ballot box.'


In work earlier this year, myself and colleagues at the Institute for Fiscal Studies argued that if one wanted to go down the route of tax devolution, a local income tax looks the most sensible option, for a range of reasons including administrative feasibility and scope for accountability via the local ballot box. But how should we decide if we want to find more money for local government via national or local taxation in the first place?

That brings us to a second major issue – how much priority we place on local incentives for boosting growth and tackling the drivers of spending needs, plus local discretion over tax and spending policies – versus how much we care about redistribution between rich and poor areas, and how consistent service provision and tax levels should be across regions.

Decisions are needed on how to trade off worthy objectives of local responsibility and discretion versus national solidarity and consistency. It’s not a binary choice, and the answers may differ for different services – perhaps we’ll accept discrepancies in leisure facilities over social care? But unless we work out what we’re trying to achieve, we risk a funding system ill-suited to what we expect of councils in different places.

The government and sector are considering the funding system in some depth in the business rates and fair funding reviews. But consultations have so far failed to address the bigger issue – what do we expect from local government?

Unless we start asking that big question, we risk muddling along for years still. As an economist I cannot answer such an inherently political question, but I can help point out the issues and options. That’s the aim of the latest report from the IFS – to spark a proper debate. Now, can anyone help sneak it in to that rather large in-tray at Number 10? 

For more information, see English Council Funding: What’s Happened and What’s Next? and Taking control: Which Taxes Could Be Devolved to English Local Government?

David Phillips is speaking at the Public Finance Live conference on Developing local resilience at 10.15am - 11.15am on Wednesday 10 July.  

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