Just a lull in the funding storm?

By David Phillips | 13 November 2019

With an upcoming election and the start of a new decade beckoning, it’s time to both take stock of just how much the local government funding environment has changed over the last decade, and look at what the future might hold.

That is what a new report by IFS researchers English local government funding: trends and challenges in 2019 and beyond seeks to do. It finds that while cuts to overall spending on local services came to an end in 2017–18, this could be just a lull in the storm. The pattern of cuts seen and the reforms to the finance system made over the last ten years could also have big implications for how different councils and the sector as a whole fares in the 2020s and beyond.

First, it’s worth reminding ourselves just how big the cuts have been since 2009-10.

On as close as possible to a like-for-like basis, councils’ spending on services is 17% lower than a decade ago, after accounting for inflation. And population growth means that spending per person is down 23%.

The vast bulk of these cuts took place during the first half of the decade: spending per person fell 21% between 2009–10 and 2015–16. Since then it has been more stable, reflecting the fact that continued cuts to revenue support grants have been almost offset by new grants for social care, above-inflation growth in business rates revenues, and a 15% above-inflation increase in council tax revenues per resident. The latter is partly explained by a hefty increase in council tax bills. But it also reflects falls in the amount councils are spending on council tax support schemes.

It’s well known and been widely reported that councils in more deprived areas have had to make bigger spending cuts: around 31% per person, on average, for the most deprived, compared to 16% for the least deprived, reflecting the way grants were cut in the first half of the decade.

Two things are probably less discussed.

First is that the local government system continues to be pretty redistributive. Spending on services other than public health is 1.3 times higher, on average, in the most deprived areas than in the least deprived. But that is down from 1.6 times higher back in 2009–10. And without defining what we expect from councils in terms of service range and quality, and a robust way of estimating how much different councils need to meet these expectations, we cannot say whether the new or old funding and spending relativities are fairer.

Second, is that the pattern of cuts makes carrying out a spending needs assessment harder for many council services (although more robust methods are used for social care). If spending assessments are based on post-cuts spending patterns, they will give a lower weight to deprivation than if they are based on pre-cuts spending patterns. But that just reflects the fact that funding cuts in the meantime have fallen more heavily on more deprived areas. We are back to square one.

This means the next government will have to make an inherently subjective decision about whether current relative funding levels for different councils are broadly fair – or whether to reverse some of the changes in spending patterns that have taken place over the last decade.

Another big change is councils’ increasing reliance on local tax revenues for their funding. Council tax now accounts for almost half, up from just over a third in 2009–10, if we adjust for the fact that the government used to pay many low income households’ tax bills via council tax benefit. Almost 30% comes from retained business rates, up from nothing a decade ago.

This matters a lot for the future because different councils can raise very different amounts from council tax. For example in the most deprived tenth of council areas, forecast council tax revenues are £336 per resident this year, compared to £599 in the least deprived tenth of council areas.

This means if increases in council tax are meant to pick up much of the burden of the rising demands for and costs of service provision, deprived areas could find themselves losing out again. The government could avoid this by building in assumed council tax increases into its calculation of ‘tariffs’ and ‘top-ups’, and any grant funding it provides to councils. That is what is done in Wales, for instance, but it can be controversial.

Different areas will also see their retained business rates revenues grow at different rates. Perhaps surprisingly, over the first seven years of the business rates retention scheme, councils in deprived areas seem to have retained just as much above-inflation growth in business rates than those in more affluent areas, on average. But plans to reform the levy on revenue growth for councils with high rates revenues mean this is probably less likely going forwards.

What about the levels of funding for the sector as a whole?

Taken together, the additional grant funding and maximum council tax increases announced for next year should more than meet the in-year spending pressures facing councils. But it will undo at most one-fifth of the peak-to-trough fall in spending, and leave spending per person 20% lower than in 2009–10.

Moreover it could be just a lull in the storm. After examining projections of councils’ spending needs from a range of organisations, the report shows that revenues from council tax and business rates are highly unlikely to keep pace with the rising costs and demands faced by councils. That is true even with council tax going up 4% a year – double the rate of inflation – every year.

For example, based on the OBR’s central projections of the cost of adult social care services rising 3.4% above inflation each year, the report finds that councils could need almost £4 billion in additional funding a year in today’s prices by 2024–25 if council tax increases were pegged at 2%, rising to a huge £18 billion by the mid 2030s. Even with 4% increases, an extra £1.6 billion would be needed by 2024–25 and almost £9 billion by the mid 2030s.     

And that is just to cope with rising costs under the existing social care system, and stop spending on other services – like children’s services, public health and housing – falling further as a share of national income.

Reversing the cuts to the numbers of people receiving care – which fell by 27% during the early part of the 2010s, before stabilising – or removing or reforming means-tests would cost billions more, with these costs rising over time as the numbers of elderly and disabled people grows.

This might seem like worrying about nothing given the cash being bandied about in the election campaign. It is true that the purse strings have been loosened, but largely for headline-grabbing new policies and announcements. And plans by both main parties to run a balanced current budget leave little room for extra spending, unless paid for by higher taxes. The next government will therefore face a choice both over whether (and how much) to raise taxes, and how much to spend on simply meeting the rising costs of existing services like social care, versus new or more generous plans for certain services. What it decides could have big implications for councils and those who rely on their services.

David Phillips is an associate director at the Institute for Fiscal Studies and leads its work on devolved and local government finance. The report English local government funding: trends and challenges in 2019 and beyond was published on 13 November, and forms part of a major programme of work funded by the Local Government Finance and Devolution Consortium, which is supported by Capita, CIPFA, ERSC, PwC, The MJ, and a group of local government finance bodies.

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