A “proper” transitional system could improve funding predicatability

Adrian Jenkins argues local government needs a system that provides a “stable and preditable resource base” not just the right funding levels.

Massive changes in funding are planned for 2022-23, with some authorities expecting to lose more than a third of their current resources. Yet, even if we can forecast the changes with some confidence, no-one knows how fast the changes will be implemented and how “transitional support” will work.

As a result, authorities will start to make financial plans this summer before knowing the effect on their finances.

This uncertainty is nothing new. The sector periodically goes through the high drama of a funding reviews where all the funding pieces are thrown up in the air and local authorities wait anxiously to see where they fall.

We are currently in the middle of an extreme version of one of these periodic funding reviews. Funding distribution was last reviewed in 2013-14 (and even then, only partially) so the outcome of the current review will result in some huge swings in funding.

Despite this dysfunctional way of handling funding reviews, there does not seem to be any great clamour from within the sector to do anything differently.

Authorities are resigned to the fact that this is just how Whitehall does things. And there is some truth to this: Funding distribution is as much political as it is a technical exercise; the recent furore of the towns fund and levelling-up fund shows that local government funding can be front-page news.

But it must be possible to give authorities more financial certainly without removing political choice from ministers.

Answers

The problem is that funding reviews start from a basic misconception. They are built on the premise that if only enough evidence can be assembled, then the “right” answer will be revealed.

In reality, there is a limit to how much a formula can accurately reflect the huge range of different characteristics and needs in local authorities nationwide. Distribution is also about judgements and preferences as much as data and evidence.

But this also misses the point. The purpose of funding settlements is to allow local authorities to plan and deliver services. To do this, local authorities need to be able to plan over the medium term, and to do that they need to have a reasonable idea of the resources that they will have available over that period.

So, what the sector really needs is a funding distribution system that reflects different needs as accurately as possible, but provides a stable and predictable resources base on which authorities can plan and deliver services.

These two objectives can work together. The current solution is to have a multi-year settlement following a review of “needs”. Depending on the spending review cycle, this typically gives authorities a three-to-four year settlement. These have been very popular with councils because they provide certainty, even if it is limited to core funding.

Since 2019-20, however, we have had a return to one-year settlements, which shows just how brittle the current system is.

Transitions

It is technically feasible to adopt a much wider-based and durable transitional system. A damping, or “transitional”, system could give authorities the certainty that their resources would not reduce by more than a given percentage per year (the actual figure is less important than there being one).

The breadth of the damping system could be limited to core spending power (that is, the main grants plus assumed council tax) or could be set much wider to include other grants, even elements of the business rates retention system.

It could be self-financed, with damping payments funded by scaling-back allocations to those authorities with increases in funding. So, no additional funding required from the Treasury.

And crucially, such a system could be a permanent feature of the funding system, rather than an ad hoc arrangement for the implementation of changes in funding formulas.

In its only statement on damping (in the December 2018 consultation), the government said transitional arrangements would unwind as quickly as possible and take into consideration a wide range of funding streams. But there is no commitment on its scope or the scale of support that it would give. Normally, “damping” is the last element of a funding review to be determined, whereas we would propose that it is the first: Indeed, it should be an enduring framework for funding reforms.

Critics will say endless damping will only ensure that every authority gets the “wrong” funding allocation every year. And that periodic resetting of the system at least results in authorities getting the “right” allocation once in a while.

However, it is getting on for close to a decade since any authority received the theoretical “right” allocation. The last review of funding was implemented in 2013-14, and the damping that was required following those changes is still frozen in place. And, as we have seen, there is no such thing as the “right” distribution of funding.

In fact, having a proper transitional framework might actually result in a more robust funding formula (not necessarily “right”, but closer to being “right”).

Ministers could make the changes that are justified by the evidence in with confidence that the financial impact on authorities would be manageable. One reason for the delay in the current Fair Funding Review (it should have been implemented in 2019-20) is concern that the financial impact could overwhelm some local authorities.

Winners

Of course, the other main critics will be the putative winners from a funding review. They will want to take their gains as soon as possible and there is nothing wrong with that.

But the impulse to introduce changes more quickly just creates large swings in funding and greater instability for everyone. Surely it is better for the sector if all authorities move towards a destination in a predictable and guaranteed way.

Creating a damping system that operates over the medium term, or beyond, would give councils certainty about the maximum decreases in resources not just for next year but in any year.

Decisions would still have to be made about how to distribute resources between councils but a proper “transitional system” would provide hugely enhanced predictability of future resources – and with it, better financial planning and service delivery.

But, unfortunately, such changes are unlikely to be introduced, and authorities will have to cope with the uncertainty and drama that accompanies every funding review.

Adrian Jenkins leads the funding advisory service at Pixel Financial Management.

AWARDS INFORMATION

Read about the awards here.

Read about the seven categories here.

For submissions click here.

To read case studies of finance team impact, click here.

————————————-

FREE monthly newsletters
Subscribe to Room151 Newsletters

Room151 Linkedin Community
Join here

Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address

Room151 Webinars
Visit the Room151 channel