Britain has one of the most centralised forms of government in Europe. Local councils provide many of the essential services we all depend on, but a large proportion of the funds come from, and are controlled by, central government. And now local councils are running out of money.
The national/local relationship has always been difficult, for a number of reasons. The councils with the greatest needs are least able to raise money locally through council tax or other charges. Local councillors are elected to respond to local needs, but central government often wants them to deliver national priorities. Sometimes councils are asked to bid competitively for funds for particular national priorities, which is expensive and frustrating, especially for those councils whose bids are unsuccessful. And most funding is managed on an annual basis, making long-term planning difficult.
The relationship is also intensely political. When savings are needed, it often suits central government to put the blame for cuts on local councils. It is also tempting for national government to devise funding formulae which favour areas which support the ruling party.
Funding has been cut severely
All these factors have been in play since the coalition government of 2010 set out to reduce the dependence of local councils on central grants. And austerity has added pressures. Over ten years, central government grants have been cut in real terms by 40%, and the Local Government Association (LGA) calculates that the effect has been to cut council budgets by more than a quarter.
Some local government functions are statutory: the law requires them to provide services like refuse collection, school transport, and social care for old and disabled people. As a result, cuts have fallen disproportionately on ‘discretionary’ services like women’s refuges, leisure centres, libraries and some support for homeless people. Many councils have been forced to sell off public assets like playing fields or council housing. Councils have been encouraged to seek new ways of raising money, though not all have the expertise or controls, as Thurrock council discovered.
Bankruptcy threatens a growing number of councils
As local councils come to the end of the annual budget-setting process, a growing number are running out of money. The LGA says that this is no longer a matter of a few badly managed councils: it is affecting large numbers. In the East of England, eight now have debts which amount to more than £2,000 per head of population. They are Thurrock, Luton, Brentwood, Stevenage, Harlow, Dacorum, Uttlesford, and Welwyn Hatfield. Only six of the 50 councils have no overall debt.
Technically a local council cannot be bankrupt, but if its chief financial officer finds that it cannot meet its financial obligations, she can issue a ‘Section 114’ notice, which has a similar effect. After that, the council can make no new funding commitments, and it usually results in the government issuing instructions, or appointing a commissioner to take control away from the elected councillors. So far, six councils in England, including Thurrock, have done that. The biggest is Birmingham City Council, which is facing a demand to privatise, by selling off £1.25bn of public assets, and potentially to close or shrink a host of services. But the problem is much more widespread, and a cross-political party enquiry has calculated that the overall funding gap in England is around £4bn.
Learning from other countries
The Local Government Information Unit has been looking at how local government funding is managed in comparable countries, and has come up with four proposals which might save local government and the services which they provide.
The first is to reestablish a local government needs assessment process. In 2013 the coalition government suspended the previous system for distributing government funds according to need, and in 2016 the Conservative government announced a Fair Funding Review. Although consultation on this finished in 2018, nothing has been done since. The Unit proposes that a new system should allow longer term settlements with annual adjustments, making long term planning possible.
The second proposal is systematic equalisation. This would involve a formal agreement about how resources should be shared between national and local government, and the distribution of the various tax streams according to need.
The third proposal is to create a new statutory standing commission to oversee the financial relationship between central and local government. This is used successfully in Germany, Italy and Japan, and is being created in Australia and New Zealand. The commission would provide an independent forum where the two parties could negotiate around their competing priorities, and develop light touch monitoring of performance.
Finally, and most radically, they propose a formal settlement to assign tax revenues. This would mean that a fixed proportion of some national tax revenue would be handed automatically to local government. In Germany, 25% of all VAT revenue goes directly to local government, distributed according to a needs-based formula, and Japan has a similar Local Allocation Tax. How that money is spent is not controlled by central government.
In the UK this could be done with a range of taxes including income tax, VAT, employers’ NI, corporation tax, vehicle excise duty, and stamp duty. This would counter the problem faced by many proposals for fiscal devolution: that richer areas raise more money, which increases inequality.
A solution?
Together, these changes would remove the funding of local government from party political squabbling. They would ensure stability and fairness, and restore the power of locally elected politicians to make decisions to meet the needs of their own communities. How the money is spent locally would be up to local politicians, but they would have real control over what they provide (and don’t provide) for the people who elect them, free from the current constraints of short-term and politically directed national funding.
In the last 20 years both Italy and Japan have moved away from a strongly centralised model of government funding, so it can be done.
A recent survey by the Local Government Information Unit found half of senior councillors expect their authorities to go bankrupt in the next Parliament unless the system is reformed. It would be good if something could be done before the trickle of Section 114 notices becomes a flood, and we see more of our public services vanish.
