Our indicative estimates find that:
This paper represents the first in a series of forthcoming papers from NEF outlining options for reforming local government finance
This paper sets out the extent of cuts to local government finance over the last decade, as well as projecting forwards five years to show that they are expected to continue in effect. As revenue is falling, demand for services is rising. We further show the true extent of the local government funding gap once increased need is taken into account. We disaggregate results at a local level. We discuss the impacts of austerity on local governments and their responses to it, to argue that local authorities are at breaking point and reform is needed. Finally, we discuss some key principles behind any reform to local government finance.
Local government is in crisis. The policy of austerity – discretionary cuts in government spending - enacted by three consecutive governments since 2010 has severely impacted on the day-to-day public services relied upon by millions of families. Local authority leaders across the political spectrum now say they are stretched beyond the point of making savings without impacting front-line services . Many local councils fear they will not even be able to fill their statutory duties going forwards unless cuts are reversed: a view that is now shared by the government’s own public audit watchdogs.
This means local authorities will be unable to provide essential services which support the most vulnerable in society such as the very young and elderly. Assessing the level of comparable funding for local authorities across time is complicated. On the funding side, following the move to 50% retention of business rates since 2013/14 central government has announced plans to allow local authorities to retain 75% of business rates income by 2020/21. On the spending side, a growing population, changing demographics and greater levels of need mean more resources are required to deliver services at the same level of access and quality. Meanwhile, local authorities have also seen their responsibilities change over time.
Local authorities have responded to austerity and changes to the funding landscape in a range of ways. However, there are clear signs that they are at breaking point as services are declining to an unacceptable level of quality, and they are becoming unable to meet basic needs.
It is clear that local authorities will be unable to fill that gap without significant reform to the local funding landscape to ensure that vital local services are properly funded. It is likely this will involve significant reform to either business rates, council tax or both. It may also involve the introduction of new local taxes or the further devolution of those that are currently national.
The need for reform represents an opportunity to rethink the relationship between national, local and indeed even (sub)-regional government. What is the appropriate level of granularity for responsibility for revenue generation and service delivery? How can risk be effectively pooled, whilst ensuring local governments have the autonomy to be responsive to local need and priorities?
In addition, any reforms should seek to reduce systematic inequality of funding between different authorities and the potential for postcode lotteries for vulnerable people in need of services. Finally, they should not seek to remove power from local governments, and where possible give local government increased autonomy and control over generating revenue and spending it – as long as finance follows function and local authorities are able to deliver services to an acceptable quality. With these final two goals in mind, it is crucial that we get the mechanisms by which local authorities pool resources and how resources are redistributed between authorities right. Currently that mechanism is the business rates retention system, which will be the subject of our next paper
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