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Local authorities are facing a £26bn funding gap, and that’s not the worst of it

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The money local authorities receive from central government has been slashed by 86% since 2010 - and there's worse to come.

Local authorities in the England have been at the sharp end of austerity for almost a decade. Now, new research shows just how wide the gap in their funding will grow unless we take action. But the problem isn’t just the amount of money they need, it’s the whole way that funds are provided.

The research is published by the New Economics Foundation (NEF) and the TUC today . It shows that in order to return to the levels of service councils used to provide in 2009/10, they would need an extra £25bn, by 2024/25.

Council funds have been slashed

Since 2010, the money local authorities receive from central government, has been slashed by 86%. The consequences of this have been felt all over the country; spending on homelessness prevention dropped 46% while homelessness increased by 58%; one in ten libraries were shut down between 2010-11 and 2016-17, weekly domestic waste collections have reduced by a third, and subsidised public bus transport travel has fallen by almost half. Non-ringfenced grants to local authorities have plummeted from £32.2bn in 2009/10 to £4.5bn by 2019/20.

But some councils more than others

But the picture isn’t the same in every council. Some councils rely more on central government funding than others. It might be that they have populations that are very dependent on their services, for instance because they are older and have higher care needs. Or it might be that they receive less money from other sources, for instance through council tax, because of the nature of the housing stock in the authority. Or it could be a combination of both.

This inequality is only going to get worse, because of a change in the way that local government is funded. Until 2013, councils collected business rates from businesses that owned property in the local authority. This money was sent directly to local government, and then reallocated according to the needs of the local authority. But since 2013, the government has been letting local authorities retain a proportion of their business rates and a proportion of the growth in their business rates. The idea was to encourage them to grow the business base in their areas and become less reliant on central government funding. As funding from central government has declined, councils have been allowed to retain more and more of their business rates.

Business rates retention isn’t enough

The problem is, that not all local authorities generate the same level of business rates, or have the same demand for their services. At the moment there is a complicated system of top-ups and tariffs to try and smooth this. But as the level of funding from central government vanishes, and demographic pressures on council services increase, local councils will become more and more unequal.

What’s more, the research assumes that we don’t crash out of the EU without a deal. The Bank of England has warned that if we do crash out, we risk a severe recession. In that case, local councils would be vulnerable to the economic downturn, but they would also face increased pressure on their services. To take just one example, many would face an influx of UK pensioners, currently resident in the EU, but forced to return by Brexit.

So, what do we need to do?

A new approach is needed that closes funding gaps, addresses inequalities in distribution, and is responsive to differing levels of need from demographic pressures.

If local authority funding includes incentives to encourage councils to promote business growth, it shouldn’t penalise communities with less resources or greater needs. Current rules on business rate retention should be amended. Council funding should be based on the needs of communities, not just the ability to growth business rate income. We believe there’s merit in the ‘growth first model’ – first proposed by IPPR - that ensures that any system of business rate retention enables all councils to grow their funding in line with the needs of their communities.

Every community needs good local services to thrive. But local authorities have seen their ability to provide for communities slashed. What’s more, the cuts have fallen much harder on some authorities than others. We need a new settlement, that restores the money councils need and restores fairness to the way they are funded.

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