Immediate response to the government’s consultation on local government funding reform

The government has today published a long-awaited consultation on reform of the local government funding system in England. This sets out how it proposes to assess councils’ spending needs and their ability to raise revenues themselves via council tax,  and how it will allocate the grant funding it provides to councils on the basis of these assessments. It sets out the government’s plans to transition to these new allocations and amalgamate a number of small grants into larger pots of funding. The government also proposes to continue with a modified version of the ‘business rates retention system’ which provides a financial incentive to councils to support new commercial property development, following a full ‘reset’ of the system next year. 

In coming weeks, IFS researchers will provide an in-depth assessment of the government’s proposals in a formal response to the consultation. 

In an immediate response to the consultation, Kate Ogden, a senior research economist at the Institute for Fiscal Studies, said:

“It is welcome that the government has decided to grasp the nettle of putting in place a proper system to fund local government – something that England has not had for at least 13 years. Such reform is long-overdue.

Updated grant allocations under the new system will fully account for differences in councils’ assessed spending needs and how much they can raise via council tax. This marks a return to the principle that if councils across the country set the same council tax rate, they should be able to afford to provide the same range and quality of services to their residents. 

In practice these reforms are likely to mean a significant redistribution of grant funding towards areas that are more deprived, and away from areas that are less deprived. That means poorer urban areas, especially in the North and Midlands, which saw their funding fall most in the 2010s, will typically see increased central government funding. On the other hand, leafier suburban and rural areas, particularly in the South, whose overall funding held up better during the 2010s, will now see reduced government funding. A full redistribution of growth in business rates over the last 12 years will also see funding shift from councils that have benefited from such growth, back into the general council funding pot.

Because such reforms have been put off for so long, the changes in funding implied by the new system could be very large for some councils. Therefore, to limit year-on-year changes, the government proposes to transition gradually to the new funding allocations over three years. A funding floor will mean that, bar a few extreme cases, the budgets of councils losing out will not fall in cash terms – at least as long as they put their council tax bills up by the maximum amount allowed each year without a referendum (5%).

Nevertheless, in the context of rising costs and demands, such councils will have to either make savings, or seek to raise council tax by more than that – either by holding a local referendum or by asking the government for special permission to implement increases of more than 5%. Of course, those areas seeing increases in funding from central government will face less pressure on their budgets and therefore less pressure to increase council tax as much as they otherwise would. 

It is important to note that the planned reforms announced today will redistribute the government’s grant funding for councils – not the council tax revenues councils themselves raise (which they will continue to keep). Nor do they change the design of council tax itself. Indeed, the consultation appears to rule out any revaluation or reform of council tax in the near future. That is a shame: being based on the relative values of different properties in 1991, council tax is even more out of date and arbitrary than the local government funding system it feeds into.

Nevertheless, credit should be given where credit is due, and the plans set out today will provide England with a rational system of local government finance once more. Rolling multiple small grants into fewer, larger grants will simplify funding arrangements for councils. And by providing multi-year budgets for the first time in several years, the new system will also help councils better plan their services and investments.  

Of course, with some councils gaining and others losing funding, the main thrust of the reforms will be controversial. Not everyone will agree that the new system should be as redistributive as the government seems to intend. And there are trade-offs between redistribution according to need, and providing incentives to tackle needs and boost growth. 

The consultation is a chance for councils and other stakeholders to provide their views on the government’s plans – and suggest alternative approaches. At well over 100 pages (plus appendices!), there is a lot of detail to dig into, and lots of areas where final choices are still to be made. At IFS, we will be crunching the numbers and looking at different options for reform, which we hope will help inform both consultation responses and the government’s deliberations.”