‘Revolutionary change’ for local government spending

New research by the Institute for Fiscal Studies has suggested that council funding reform may mean big winners and losers in local councils.

The Business Rates Retention Scheme currently allows local areas in England to keep up to 50 per cent of the growth in their business rates revenues that result from new developments.

The report A Time of Revolution? British Local Government Finance in the 2010s, highlighted how major changes to funding are making councils much more dependent on the amount of council tax and business rates raised locally. Allowing councils in England to retain 100 per cent of business rates revenue will help boost the funding of 52 councils by five per cent or more by 2017.

Conversely, 119 councils, including most county councils and metropolitan boroughs, will be relative losers under the scheme, leading to ‘greater divergence in council service quality’. However, none of these councils will have lost more than two per cent of their funding.

Excluding education spending, the report also suggested that councils are planning to spend 22 per cent less on service provision in 2016-17 than they did in 2009-10.

In England, cuts have been much larger for poorer, more grant-dependent councils than their richer neighbours, who can raise more of the money they need via their own council tax revenues. Poorer councils more reliant on grants have cut their spending by 33 per cent on average, compared to nine per cent by richer councils.

David Phillips, a senior research economist and an author of the report, said: “The changes to local government finance in England during the 2010s will be truly revolutionary. We will have moved from a system where equalisation and insurance was paramount, to one with much more emphasis on incentives for growth, but also more financial risk for councils.

“Along the way there will be lots of tricky policy decisions. And there are big picture questions, such as whether these changes will actually empower councils to deliver more growth, or just burden them with additional revenue and spending risks. The IFS’s new programme will look at both types of issues, in an effort to ensure this revolution is subject to proper public scrutiny.”