It’s time to wake up to the local government resource review

The review of local government funding hasn’t garnered much public debate but the issue couldn’t be more important for the future of local authorities.

Katie Schmuecker is a senior research fellow at ippr north

The government is currently reviewing the way local authorities are funded. Given the complex nature of the issue, the review hasn’t garnered much public debate so far, but it couldn’t be more important for the future of our local authorities.

Progressives should not be afraid of local government funding reform – indeed the current system is broken and needs to be changed – but, as ever, the devil will be in the detail.

The current system is broken because it makes local authorities hugely dependent on central government. Only around 25 per cent of local authority funding is raised locally, the rest comes from central government grant.

The danger in this lack of autonomy was starkly exposed when central government chose to implement deep cuts to the local authority grant for 2011/12 and 2012/13. A local authority wanting to cushion their citizens from the impact of the cuts, or to spread them over a longer time frame, had few means to do so as a result of their lack of autonomy.

The lesson here is local authorities need greater financial autonomy from central government.

Change is also needed because the formula grant– the needs based grant to local government, and the vast majority of its funding – is too open to manipulation from Westminster.

The formula grant is made up of four elements, one of which is designed to equalise resources between authorities, so those with a weaker tax base, and so less ability to raise revenue locally, don’t lose out. But in the most recent funding settlement, without warning or consultation, this element of the grant was cut by almost £1 billion over two years.

Detailed analysis published today in IPPR’s Public Policy Research Journal demonstrates this has effectively resulted in a significant redistribution of resources from poor areas to rich areas. In future, resource equalisation must operate one step removed from political influence.

So, the current system is broken, but what might replace it?

The government’s review is looking at allowing local authorities to keep the business rates they raise locally. Currently business rate revenue is passed to central government, and redistributed through the needs base formula grant system. As business rates constitute 80 per cent of the formula grant pot, it is not possible for councils to retain their business rates without needing to redesign the redistributive mechanism between councils.

Without redistribution, the picture for councils in some areas is bleak. The table below shows the ten local authorities where the gap between their business rate revenue and the needs of their population is greatest.

Bottom 10 local authorities where business rates fail to meet level of need

Local Authority Business Rates raised per head 2009/10 (£) Formula Grant received per head 2009/10 (£) Business rate revenue in excess of need* (£)
Hackney 277.20 1003.50 -726.30
Newham 317.27 903.35 -586.08
Knowsley 235.97 781.43 -545.46
Lewisham 163.68 671.43 -507.75
Greenwich 238.81 721.29 -482.48
Lambeth 295.84 744.11 -448.27
Isles of Scilly 595.91 1008.18 -412.27
South Tyneside 172.94 583.78 -410.84
Haringey 238.01 632.02 -394.01
Liverpool 352.10 724.26 -372.16

* Formula grant is used as a proxy for need

At the other end of the scale, some local authorities are able to raise business rate revenue far in excess of the needs of their population:

Top 10 local authorities where business rates exceed level of need

Local Authority Business Rates raised per head 2009/10 (£) Formula Grant received per head 2009/10 (£) Business rate revenue in excess of need* (£)
City of London 52106.56 8482.78 43623.77
Westminster 4393.20 717.02 3676.19
Crawley 1043.89 98.91 944.98
Hillingdon 1139.26 315.28 823.98
Dartford 792.71 79.01 713.70
Camden 1415.42 706.63 708.79
Watford 709.25 95.85 613.40
Kensington & Chelsea 1213.81 614.49 599.32
North Warwickshire 622.27 86.64 535.63
Cambridge 625.97 102.20 523.77

* Formula grant is used as a proxy for need

Clearly a straight forward re-localisation of business rates, without accompanying redistribution, must be ruled out.

The new system of resourcing local authorities must balance autonomy with fairness. For localism to be real councils need more autonomy, including the ability to raise more of their own revenue. Indeed IPPR North has argued we should move to a situation where local authorities are responsible for raising half their income, giving them real power to pursue local priorities.

But it is vital that this autonomy is complemented by resource equalisation, to ensure all local authorities have sufficient resources to meet the needs of their population. This should be done at arms length from politicians, by transferring the responsibility to an arms length, independent body.

While it may be difficult to get excited about the detail of the local government resource review, its implications could be far reaching. Progressives must engage with this debate.

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