Fairer funding – will the wait be worth it?

Chris Buss says that any review of local government finance must address social care, business rates and council tax, but the danger is that these are just too difficult to resolve.

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At the start of the year the government announced that it would be consulting on potential reform on local government finance “in the spring”. We have, of course, been here before. In February 2016 the government announced a ‘fair funding review’, which was followed by consultations in July 2016 and December 2017. The results of the latter were published in December 2018, but there has been no substantive action since then. So, will there be any difference this time round?

I think all in local government are agreed that the current method of funding support by central government needs a radical overhaul. It is clearly not right that need for funding is based on data that will soon be at least 10 years old, while the base methodology is even older. The issue is, however, that without extra money, which is highly unlikely to be found at the present time, any new distribution methodology designed to meet need that cannot be met from local taxation will create winners and losers.

It is clearly not right that need for funding is based on data that will soon be at least 10 years old, while the base methodology is even older.

Avoiding a cliff edge

This will, if we are not careful, create a division between the prospective winners and losers, and also mean that there will need to be some form of smoothing or damping   to ensure the introduction of any new distribution doesn’t create cliff edges in funding. It will therefore be sometime before the system is working effectively, and by then the system will need a further review. Anecdotal evidence exists that the current system still includes damping grant payments going back to the 2006 review.

Even if a new redistribution system is found, that only addresses part of the problem. Since the last partial review in 2013 there are also unresolved issues about funding social care and the long-term impact of the announced changes on that and the future of business rates, which in the words of one unlamented former local government secretary is “finished as a form of funding for local government”.

Unless these two issues are resolved at the same time as the new system is introduced, realistically any announcement in the near future is again likely to be a stop-gap solution. Some might see this as kicking the can down the road but for me it provides an opportunity to carry out a proper review of how we fund local services including the relationship with local taxation ie council tax.

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Nationalising council tax

The establishment, initially by capping and then the referendum principles of the Localism Act, has quasi nationalised council tax, effectively freezing relative council tax rates in the same way that the distribution mechanism has been frozen. This means that broadly across the country, the level of council tax has effectively been adjusted only by inflationary elements allowed by referendum limits over the past 10 years with limited wriggle room locally. This has contributed to the situation where a number of councils are now in a perilous financial position. A resolution is needed and quickly before others line up outside the Department for Levelling Up, Housing and Communities asking for assistance.

It is ludicrous to have an arrangement whereby taxation is based on property values that are 30 years old. Any long-term assessment of future government funding for local government must grasp the nettle of revaluation of council tax, and then redistribution of central government support should be based upon on an up-to-date tax base. In parallel, there would also need to be a loosening of the referendum principles, at least in the short term to allow authorities to adjust council tax levels to reflect the new tax base. That is, of course, assuming that the government doesn’t decide to further reduce councils’ autonomy and further restrict local tax raising.

It is ludicrous to have an arrangement whereby taxation is based on property values that are 30 years old. Any long-term assessment of funding for local government must grasp the nettle of revaluation of council tax, and then redistribution of central government support should be based upon on an up-to-date tax base.

In this brief article, I have raised just three issues that in my view will significantly impact any long-term fix to resolve how we fund local authorities in the near future. But there are many other facts that will need to be considered, which, I suspect, means that the problem will go back in the “too difficult to resolve” box as there will be too many losers in a fully reformed system, making it unacceptable to government.

So, returning to my initial question: will it be any different this time round? Probably not. The best we will get is a promise of a three-year settlement with a tinkering of the redistribution methodology. But we can live in hope, and hopefully I will be proved wrong.

Chris Buss is director of Darenace Ltd and is a former s151 officer.

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