The present model of funding for local government is unsustainable

As ever when it comes to local government, it’s news about what might happen to our council tax bills that grabs headlines. So it was last week when the Local Government Information Unit and the Municipal Journal reported that nearly all councils intended to raise their council tax rates next year, three quarters of them by more than 2.5 per cent. At the same time, nearly all are planning also to increase fees and charges. And more than half intend to dip into their reserves.

Given the steep cuts in central government support, which have resulted in cuts of a fifth in council spending since 2010, these pressures should hardly come as a surprise. Local councils have been squeezed harder than many of the other big public services — health, schools and defence, for example. So it was equally unsurprising to learn in the same survey that fully 80 per cent of councils say they are not confident in the sustainability of local government finance. Literally none said that they were “very confident”.

While their role has diminished in recent decades, local authorities continue to play a crucial part in our lives, in our democracy and in our public services provision. Even excluding school funding, over which they have little or no control, they spend more than £40 billion a year. They are responsible for funding and delivering social care for adults and children. They support communities by providing local amenities and overseeing local economic development. They deserve far more of our attention. When you get 80 per cent of councils worrying that the funding system is not sustainable, it’s time to sit up and listen.

Part of the reason for the concern is the scale of cuts. But this isn’t only a story of cuts. Funding changes have reshaped local government in two ways.

First, it is the councils most dependent on central government support — typically those in poorer and more urban areas — that have suffered much the biggest spending cuts. We have stopped redistributing so much from better-off to less-well-off areas. That said, it does seem to be some of the shire counties, which have suffered smaller cuts but started with less in the first place, that are struggling most.

Second, councils have responded to reduced resources by focusing more and more on an irreducible core of activities. Despite the overall scale of cuts, spending on children’s social care has actually risen, while spending on adult social care has been cut by much less than the average. The result, of course, has been very deep cuts in almost all other services, with spending on housing, planning and economic development down by a half. Excluding schools, almost two thirds of the budgets for which councils are responsible now go on social care.

The primary purpose of local government, then, has become the provision of social care. Yet social care policy is set in Whitehall. You are supposed to be entitled to the same provision wherever you live. At the same time, councils are becoming more dependent on their own tax-raising powers. Not only have government grants been cut, making locally raised council tax more important, but part of business rates revenue is now also devolved. A council’s resources now depend in part on local growth in business rates.

But there is no correlation between growth in business rates and the need for social care spending. One perfectly understandable policy aim — to set national standards for social care — comes crashing headlong into another — the desire to devolve taxes and increase the incentives on local authorities to raise their own revenues. You can’t have both, however much ministers might pretend you can.

Government policy is also to ensure that local government as a whole becomes increasingly self-reliant, eventually funding itself fully from a combination of business rates and council tax. Well, if we know one thing about demands for spending on social care, it’s that they are increasing and will continue to increase as the population ages. Demands will rise faster than revenues from council tax and business rates. Even annual rises on council tax bills of 4 per cent will not see revenues keep up with demand.

So those councils responding to the survey are right. The present system of local government finance isn’t sustainable. Something is going to have to give.

It already has, in a way. The past few years have seen a series of top-ups to planned funding to bale out increasingly overstretched social care services. Plans set out in 2015 have proved undeliverable.

That’s no way to run things in the longer term, although continuing to muddle through by topping up spending with additional ring-fenced grants is probably the short-run default. Eventually, we will need to make a choice: more central funding and a genuinely national set of standards, or more devolution of tax-raising powers and more acceptance of local variation. Either local councils will need more tax-raising powers of their own, perhaps from a local income tax, or central government will have to find those revenues from central funds.

In the meantime, there is yet another big uncertainty for councils looming over the horizon, the so-called Fair Funding Review. This is the irregular attempt by government to update the basis on which the allocation of the, severely diminished, local government funding pie is determined. It needs to be done and it needs to be done as transparently as possible. The present distribution of funds no longer relates to anything very much, but layer this uncertainty on top of everything else and it’s no wonder that those running our local government are fearful for the future.

This article was originally published in The Times and is reproduced here with full permission. Paul Johnson is director of the Institute for Fiscal Studies. Follow him on @PJTheEconomist.