Receive our newsletter - data-led analysis, original reporting and insights
Government / Local politics

Three reforms needed to tackle the crisis in local government finance

New research published in the Times on 8 February highlighted the scale of the funding crisis facing many councils across the country, with nine out of ten councils expected to be millions of pounds over budget by the end of the year. This followed the decision that week by Northamptonshire County Council to issue a Section 114 notice, meaning that it will introduce no new spending except on statutory services for vulnerable people – the first such notice issued in nearly 20 years.

In part, the situation in Northamptonshire is a result of poor financial management and political leadership. But this failure – and the struggles that other councils face – also reflects a decade of relentless tightening of local government finances. Many cities have seen cuts of nearly 50 per cent to central government funding since 2010, considerably more than the cuts that other parts of government have faced.

Moreover, it highlights the limitations of a local government funding system dependent on central government for income and for balancing the books, rather than being able to grow their income independently. If the only tool a city has to balance its budget is a knife, then all we’ll see are cuts.

Offering piecemeal bailouts or fiddling around the edges of the system, as the government has done in recent years, is not the answer. For cities to have stable finances and prosperous local economies, they need the tools to raise revenues with taxes that support sustainable economic growth.

So what should the government do to make the local government system stable and sustainable?

1. Revalue and devolve council tax

Regressive both nationally and locally, the failure to revalue council tax since 1992 means that it does not reflect the wide differences in economic gains seen across the country since then. Relative winners are homeowners in the South with more valuable homes and higher salaries, while those in the North where wages and assets have not grown so much carry a disproportionate load. For example, a £1m home in London is taxed to nearly the same amount as a £100k home in Sunderland. As a tax on home values, it fails on its terms.

To address this problem, there should be annual revaluations, and local authorities should have the power to introduce new bands and vary rates freely. This would support new development, and would enable local leaders to address budget issues by raising revenue rather than by simply cutting.


2. Reform the business rates system to make it more responsive to local economic conditions

This is the only tax of its kind in the UK where the amount raised is determined before the rate is decided. As such, even if the number of companies paying rates increases, the amount of business rates raised does not go up.

As our recent briefing on business rates devolution shows, one damaging effect of the current system is that it favours building more floor space in large developments – often in out of town areas – over improving and expanding the value of office space in city centres, where higher knowledge firms often seek to locate.

This has implications for economic disparities across the country. Cities in the North with an already large share of low skilled jobs are incentivised to attract more big new distribution sheds, when they really need to secure more high skilled jobs to grow their economies. Introducing annual revaluations would make the business rates system more reflective of increases in rents, not just increases in floor space. This would sharpen the financial incentives for cities to invest in and support the transport networks, high quality office space, and public realm that high-knowledge firms and workers are looking for.

3. Pooling finance at city region level

In UK cities, people live and work across multiple local authority boundaries. Over 50 per cent of people commute into a different local authority to work.

And different areas play different roles within cities, some more commercial (most often those in the centre) and others more residential (more likely the surrounding areas). This affects the levels of council tax and business rates raised across different authorities within the same city, and creates a divide over where business rates are raised and where the workers contributing to these rates use services.

Pooling at the city region level would help to improve the stability of local finances by diversifying and broadening the tax base. Doing so would also improve how big decisions are made within a city region about where to build commercial or residential space. Under the current system, councils within a city are understandably driven to boost their local tax base through new development. Pooling would help to secure higher absolute levels of council tax or business rates revenue across a city by putting it where it is most needed at that more representative scale.

In the current system, other councils may manage to avoid having to follow the example of Northamptonshire. But without this fundamental reform, we will see more cities cutting down on the activities they fund – which will be bad news for their economies, and for the people living in them.

Simon Jeffrey is a researcher and external affairs officer at the Centre for Cities, on whose blog this article first appeared.

Want more of this stuff? Follow CityMetric on Twitter or Facebook.
This article is from the CityMetric archive: some formatting and images may not be present.