Is it time to remove the reins on local government finances?

By Alison Ring | 13 November 2023

The recent high-profile 'bankruptcies' of councils of different political hues have brought the issue of local government finances to the fore. As difficulties mount, there is a growing acceptance across the political spectrum that radical reform is needed to the way local government works and how it is funded.

England has the most centralised local government finance system in the developed world, with Whitehall collecting 95% of tax revenues, and heavily determining spending priorities. Councils have little autonomy over levels of council tax and business rates, and are increasingly losing what discretion on spending they may once have had.

The system is laced with inefficiencies. Many readers will be familiar with competition for economic development funding for councils, such as the shared prosperity fund, which force authorities to use time and resources on applying for funding, before more time and resources are spent in Whitehall assessing these bids. Should central government be involved in the minutiae of whether a local authority should be granted funding for public conveniences, or deciding which neighbourhood parks should be eligible for an outdoor chess set?

This is not the way to run local government. The city centres and streets of France, Germany and the Netherlands – where local authorities have the spending power and democratic autonomy to fund trams, housing developments and cycle lanes, for example - demonstrate what fiscal devolution can look like. Fiscal devolution is the norm outside the UK in both federal and unitary countries, with England being very much an outlier.

The UK’s nations have significantly more autonomy than English regions, with a patchwork of differently tailored devolution arrangements across Scotland, Wales and Northern Ireland. Notwithstanding the fact that these nations have a strong historical identity and have had a journey to devolution fraught with challenges, their devolution settlements demonstrate that fiscal power can be taken back from Westminster if there is the political will to do so.

Both main political parties have increasingly talked about devolving more power to regional and local government in England in order to ‘level up’ opportunity and address inequality. This is why at the Institute of Chartered Accountants in England and Wales (ICAEW), we recently worked with the Fabian Society on a report exploring proposals to reform economic development funding. The Fabians asked how England can leave behind its bureaucratic, centralised and micromanaged system and what should take its place; we were pleased to support exploring options to strengthen the ability of local and regional governments to contribute to improved economic outcomes and  reduced inequality.

Their report proposes a fiscal devolution framework aimed at improving living standards and empowering local communities, without consequentially embedding inequality. The Fabians’ solution doesn’t copy and paste any other country’s system but instead proposes an English solution to an English problem, working with existing institutions and building on the governance options that we already have. Their model primarily focuses on devolving power to regional and local authorities, giving them control over how economic development funding is allocated and spent, and it provides some additional tax-raising powers to fund infrastructure investment. The Fabians believe that such a system, if implemented, would be fairer, more accountable, and more democratic.

Our view is that fiscal devolution is not only about what it can do to improve local government. It would also be better for central government, which currently wastes a huge amount of Whitehall time and resources trying to direct what is going on locally and subsequently failing to deliver on its own policy objectives.

Micromanaging is an ineffective way to run any organisation, let alone a nation the size of England.

Alison Ring is director of public sector and taxation at the Institute of Chartered Accountants in England and Wales

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Local economies Whitehall Business rates Council Tax Funding Fiscal devolution