We start with a quote from the Guardian: “No one, ever, wants to talk about remote, unglamorous, local government funding.”
Today we’ll be discussing remote, unglamorous, local government funding – specifically how proposed changes to the system may significantly decrease the money some councils have to spend.
Local Council Funding – What is it and Where Does it Come From?
‘Local council’ describes a two-tiered system of local government; the first tier is comprised of county councils and the second-tier district, borough or city councils. County councils are responsible for local services that include: education, transport, social care and libraries; district, borough and city councils are responsible for rubbish collection, council tax collection and housing. Sitting below district and borough councils are parish, community and town councils; they are responsible for things like public clocks, children’s playgrounds and allotments. Together, these groups make up local government in England.
Local councils are funded through a combination of council tax, business rates (a tax on properties used for business) and government grants. Rents, fees, sales, investments and contributions also form part of local council funding. The vast majority of local council spending goes on capital projects – that’s things like fixing roads and repairing public buildings – council houses, and services like waste management. Some councils charge higher and lower rates of council tax; this is calculated by deducting the planned spending for the year from any reserves, incomes, and government funding.
The amount of revenue a local authority needs to raise through council tax (its council tax requirement) is calculated by deducting from its planned spending any funding from reserves, income it expects to raise, and funding it will receive from the Government.
Local Government Spending: ‘Fair Funding Review’
How local government is financed in England is currently going through a series of changes, and central government is working with local councils to review the impacts these changes are likely to have (in the government’s Fair Funding Review). According to the Institute for Fiscal Studies’ (IFS) report (titled The Fair Funding Review: a review of the key issues), local government:
“[Will] see its focus shift from being based on redistribution according to spending needs, towards more emphasis on providing financial incentives to tackle needs and to boost local revenue-raising capacity.”
Will local councils be required to justify their spending choices in accordance with the needs of their citizens before funding is received? While the precise details of this ‘focus shift’ remain somewhat unclear, the IFS did look at some proposed changes in funding distribution to see how local council needs may be judged in the future. For various services, the Ministry of Housing, Communities and Local Government (MHCLG) has proposed funding prediction formulas based on the relationship between past councils’ spending and local “needs indicators”. Presumably, this would show how each council judges the importance of needs indicators, as well as creating an overall picture of how councils in England spend their funds.
The IFS noted that this proposed model was a step towards a more objective funding pattern; this is due to all councils being accounted for in the formula, regardless of their decision to spend more than another council for an identical or similar service. The report commented on how “such an approach does not ‘reward’ a council with a higher estimate of spending needs just because it chooses to spend more,” as objective evidence would show that other councils are delivering the same service for a lower cost.
The formula offers objectivity by aligning council spending, but the proposed formula does not account for what the IFS calls “factors other than needs”. These factors could include local preferences and would warp the formula if conflated with needs indicators in the same area. An example could be a higher cost for recycling in a particular council (due to an increase in recycling depots – a preference) in a locality that already has weekly recycling collections; the need for further recycling depots is small by the formula’s standards, but the area’s ageing population with gardens results in many wanting to clear away the clutter during the weekend. Costs for this local area would seem higher than average for recycling, but the bigger picture of encouraging recycling has potential future benefits and, arguably, deserves more investment. Under the formula, this would likely be deemed ‘overspending’ and might be reduced.
Where Do Needs Indicators Come From?
Another problematic element of the government’s proposal is the concept of needs indicators; who defines these ever-evolving needs? And how is the baseline for needs spending decided? The IFS report looks at how taking different financial years as a baseline (2008-09 and 2016-17 respectively) results in vastly different funding numbers. Similarly, significant cuts in local council funding in the 2009-10 financial year seemed to indicate that local needs were not quite as important as the government’s austerity package. These changes in policy directly impact the definition of needs; by lowering the ceiling, citizens expect less from their local councils. The report highlighted how formulas based on funding from 2016-17 would likely hit deprived areas hardest; in short, the MHCLG’s choice of baseline year for the formula will have a significant impact on the council funding outcome.
What remains clear is that this is an important time for local councils. Funding for those essential services and projects that we rely on will change, for better or worse, as a result of this new system. Do you think councils will be riding on a new wave of funding, or will it be more capital punishment for our essential, local services?
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