Local government funding – where are we now?

Despite the prominent role that local government has played in the response to the pandemic to date, the financial picture has not greatly improved , writes CIPFA CEO Rob Whiteman as he provides a breakdown of the local government financial picture

On the 23 March 2020, the Prime Minister announced the first lockdown to aid in the fight against the pandemic. At the time, it seemed the move to mass working from home was only set to last a few weeks – a few months tops. Yet here we all are, one year later, most of us in much the same position as we were that fateful day. Across sectors, all organisations have faced a variety of challenges, none more so than local government. The last 12 months have presented a once-in-a-generation obstacle to overcome. Across the board, local authority professionals have stepped up to deliver the services that communities need at this difficult time. While the government support that has been made available has been welcome, it has not been even close to sufficient to bridge the funding gap created by the pandemic. That’s not to mention the local government funding black hole that was already present following a decade of austerity and the increasing pressure on demand-led services like social care.

When the pandemic began, the language used by ministers indicated that government would do whatever it took to support local authorities through the Covid crisis. Many took this to mean that any costs arising from the pandemic would be covered in full. However, by June 2020, language from the Ministry of Housing, Communities and Local Government shifted to promising future financial support in the context of burden sharing. We saw this play out most clearly in the announcement that 75 per cent of income losses from fees and charges after the first five per cent would be covered, and the decision to defer losses from council tax and business rates over three years. The fees and charges decision still left a substantial £0.8 billion hole in council finances, particularly for district authorities, and the decision to defer revenue losses from council tax and business rates simply kicked the problem into the long grass. Overall, as of summer 2020, CIPFA estimated a total £1.2 billion gap in local authority finances.

The current financial picture
Fast forward nine months, and we’ve had the Spending Review, the local government finance settlement and a Budget. Despite the prominent role that local government has played in the response to the pandemic to date, the financial picture has not greatly improved. The November Spending Review announced a 4.5 per cent increase in core spending power. It should be noted that an increase of this nature would largely be absorbed by the increased social care costs off the back of the pandemic, this increase was also contingent on local authorities raising the bulk of the revenue themselves by raising council tax to the maximum 4.99 per cent.

At a time when many individuals, communities and businesses have been battered and bruised by Covid-19, this is a politically uncomfortable choice to make at the local level especially when the national rhetoric was no tax rises. The pandemic has increased demand on services, and those services need to be paid for somehow. Yet at the same time, making spending power contingent on an already regressive, out of date property tax puts pressure on those taxpayers least able to withstand it.

CIPFA’s recent council tax survey showed that that, across the board, councils did not choose to raise council tax to this degree. The average increase across England and Wales came in at 4.3 per cent for 2021/22. There was also a stark contrast between regions, with a difference of two percentage points between the highest increases in Inner London (5.5 per cent) and the lowest (3.5 per cent) in the East of England.

We estimate that this will result in a shortfall of around £217 million against the spending power that the government assumed in the 2020 spending review. This shortfall will need to be managed locally and, while the approach may differ across the country, in all cases hard decisions will be needed about services being provided.

The Spending Review also saw the announcement of the government’s £4 billion levelling up fund. We have concerns that this is another fund oriented around bidding. Such funds run the risk of further entrenching the inequalities we would assume the levelling up agenda is intended to reduce. Bidding creates a system that pits local authorities against one another, with those that have the resources and expertise to create the best bids often coming up trumps. These tend to be the larger, wealthier authorities, such as those in London and the South East. Such funding mechanisms do not necessarily allocate funding in line with need, meaning those areas that need it most and don’t have the time, money and manpower to facilitate the best bid lose out. While the prospectus for the fund announced at the Budget this month outlined a number of priority areas, that’s no guarantee they’ll benefit the most. The success of the levelling up agenda and the UK’s ability to tackle regional, economic and social inequality will be contingent on funding being aligned with greatest need.

Since the turn of the year, the government’s rhetoric has a renewed focus on recovery, with the chancellor’s spring budget pledging this time to do whatever it takes for people and businesses rather than for public services. If anything, the restart grants and tapering arrangements for business rates relief, while undoubtedly welcome for businesses, create administrative burdens for local authorities already under strain from demand on services and additional financial reporting to MHCLG. Further, while we would not have expected the Budget to set out proposals for large scale reform, it was disappointing to see neither social care nor public health getting a mention. Both areas require greater investment and planning certainty as a matter of urgency. The budget could have represented a good opportunity for the government to signal the importance of these functions, given the role they’ve played in tackling the Covid crisis, and indicate a direction of travel. Not only was this opportunity allowed to pass by, the subsequent announcement that public health grant allocations would only be increased by 1.4 per cent on last year will come as a bit of a kick in the teeth, given the function’s front line role in tackling Covid-19.

Another key element of the policy picture was the publication of the NHS white paper. Its ambitions around place-based population health and prevention represent a positive step in the right direction, however the proposals for integration of health and care demonstrate an apparent lack of understanding about the form and function of local government. Councils appear in the paper as a collective whole, with little consideration for the different tiers of local government and the differing stakes they will have in integration. The integration agenda is further confused by the lack of certainty on the long-awaited reform of adult social care. However, what is certain is that with social care representing the largest piece of the local authority funding pie, understanding the nuance in this area will be key to any proposals for reform and the identification of a long-term sustainable funding solution.

Last, but by no means least, we have seen the fair funding review pushed back yet again. While of course the present crisis must take priority, as we move into a phase of true recovery, progress on system-wide local government funding reform will need to be made at pace. Key to this will be a rigorous and potentially uncomfortable conversation around the purpose of local government. The form of any funding reform should follow function, and thus any meaningful movement in this area will only be possible if this fundamental question is addressed. The hole in local government finances, and the scale of demand particularly following on from the pandemic, is such that tinkering around the edges simply will not cut the mustard.

So where are we now?
One could say, the more things change, the more they stay the same. The last year has seen local government across the UK fundamentally change the way it does business in order to meet the needs of citizens and communities during the pandemic. A decade of austerity meant there was already a chasm at the heart of local government funding. Covid-19 has supercharged the risks to councils’ financial resilience and we’re already seeing this play out in the issuance of capitalisation directives in some authorities. The government’s message to the public is one of optimism – vaccinations rolling out, restrictions lifted and thus a society that is back to normal by the summer. But for public services, even if vaccinations proceed as planned, that will not be the case. Local authorities will be feeling the aftershocks of the last 12 months for many years to come, particularly in their finances. Building long-term financial resilience into the local state will be key if we are to face the next crisis that comes over the hill, whatever it may be.