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Equalisation, incentives and discretion in English local public service provision

Book chapter

The financing of local public services involves a potential trade-off between the equalisation of funding between areas and the provision of fiscal incentives for economic growth. England’s local government finance system has historically prioritised fiscal equalisation over fiscal incentives: central government grants were allocated to compensate for differences in local needs and tax bases. However, reforms and cuts to grants, and the introduction and planned extension of the business rates retention scheme are making councils’ funding more dependent on local tax revenue performance. This has the effect
of shifting the focus away from equalisation and towards incentives. In contrast, healthcare and, increasingly, education are funded centrally without reference to local tax revenue capacity.

This chapter of the British Academy's Governing England: Devolution and Funding publication describes the evolving system for funding local public services in England, with a focus on the role of equalisation, incentives, discretion and national service standards. It begins by setting out the pros and cons of local responsibility for public service spending and revenue-raising. It then describes the funding systems for key local services in England, paying particular attention to recent reforms to the local government finance system and changes to the funding of schools and adult social care services. The chapter concludes by outlining the broad choices available for future funding: (i) continuing with the current ad-hoc approach; (ii) the further centralisation of funding for adult social-care and potentially other services; (iii) increases in the general grant-funding for currently devolved services, and; (iv) the localisation of elements of health and schools funding. Each option has its pros and cons, but perhaps the most important thing is for funding policy to be consistent with broader policy objectives for different public services.

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Book chapter
How much do changes to local government finance in England encourage inclusive growth?
This report provides an initial look at the changes in councils’ spending, funding and funding systems since 2010, and highlights some of the key issues for the planned shift to 100% retention of business rates revenues by councils in England.
Newspaper article
Major changes are afoot in English local government finance. The Fair Funding Review will see new methods and formulae to redistribute funding between councils according to their assessed spending needs and revenue-raising capacity. The expansion of the business rates retention scheme is likely to ...