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Government / Local politics

Is it fair that cities get more government funding than rural areas?

Last week the Centre for Cities submitted our response to the Government’s latest consultation in its Fair Funding Review for local government – its proposals for a new funding formula to determine how much grant funding councils should receive.

The purpose of the funding formula should be to secure a good standard of well-run public services across the country based on an assessment of need and demand for those services. Cities are home to the majority of people living in England – and what the government is proposing in relation to the formula, no matter how you look at it, fundamentally misjudges the needs of those cities. That is even starker when you remember that it is already set against a background of 10 years of grant cuts.

As with all things local government finance, the proposals are complicated. But local government minister Rishi Sunak made plain the intention when he responded to MPs’ questions about our Cities Outlook 2019 report. The Minister told MPs:

We heard a lot about Liverpool and a lot about Surrey. Members of this House should know that households in Liverpool have £400 more to spend on local services than households in Surrey. Only a third of spending in Liverpool is financed by council tax versus almost 85 per cent in Surrey. This funding formula is accurate and based on the facts.

In short, the government proposes allocating resources to places based on the size of their populations. While ostensibly this appears to reflect a more balanced allocation of local government funding, it does not adequately resource the higher levels of demand for public services that tend to be seen in cities, compared to other parts of England. Although the needs assessment in the consultation is currently focused on accessibility and remoteness, which does have a geographical bearing, it does not identify how demand for public services per capita is higher in some places more than others.

With that in mind, it’s worth unpacking the minister’s statement as there is quite a lot that sits within it. First, let’s look at spend.

That more is spent in Liverpool on a per head basis is undoubtedly true. And it is also true that while spending in cities has seen double the level of cuts that places elsewhere in Britain have experienced, cities still have higher spending on a per head basis than elsewhere. The cuts have served to close the gap between the two. On the face of it, this has increased fairness in the system. That’s certainly what the minister was suggesting.


But this ignores two big factors. The first is need. Because of the make-up of their population, need in cities is much higher than elsewhere. What we know is that demand for public services is much higher in poorer communities. What we also know is that these communities are clustered in cities. Of all the people living in the top 10 per cent most deprived communities in England, 83 per cent of them live in cities. By comparison, of the 10 per cent least deprived communities, just 40 per cent of residents live in cities. In Liverpool, close to half of its population live in England’s most deprived communities, while just 0.3 per cent lived in the country’s least deprived areas.

At the same time, cities are the most productive places in England, responsible for 65 per cent of economic output. They attract people in for employment, to shop, for tourism and to spend leisure time, placing additional demands on services in cities. The formula should therefore reflect the real geography of need across England, recognising that demand for local authority services is concentrated in cities.

Second, let’s look at the ability to raise money. It is true that Surrey does fund a greater proportion of spending through its council tax base. But this is due to the far higher cost of property in Surrey, particularly when compared to Liverpool. That Surrey has such a strong council tax base is in part because of the strength of neighbouring London’s economy, which generates the jobs that many of Surrey’s resident taxpayers take advantage of.

In contrast, Liverpool raises less money from council tax because lower housing costs simply mean the levels there are no match for those in Surrey. However how much funding cities can raise varies as well; York for example generates around a quarter of its income from sales fees and charges, which it is able to do thanks to a relatively wealthy population.

The question then is, how should the lower income of some cities be reflected in how government grant is distributed to local authorities?

First, it is clear that cities should be incentivised to permit new development, and both the New Homes Bonus and the part retention of business rates do just that.

Second, allowing local authorities in the capital to permit more development to both enlarge their budgets and support London’ economy further would be a good thing. But it is difficult to see a world where the level of taxes that can be raised locally has no bearing on how government grant is then distributed, seemingly making the minister’s point a little disingenuous.

Finally, while not all cities have higher levels of social and economic need, those that do should not be penalised for this. The government should distribute money for public services to the places that need it most, while at the same time working to reduce the causes of high demand.

Paul Swinney is head of policy & research at the Centre for Cities, on whose blog this article first appeared.
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