The Institute of Public Policy Research (IPPR) published its Condition of Britain report last week. Whilst benefit reforms proposed by the Labour Party as a result of the review have grabbed the media’s attention, it’s the section on ‘persistent centralisation of power and responsibility’ that has piqued our interest. What is the state of financial autonomy for local government in the UK? What impact does this have on councils’ power? What are the potential remedies available and what dangers do these hold?
With less money comes great responsibility
Typically the financial relationship between central and local government in the UK falls into one of two categories – lots of cash with strings attached or greater policy freedom with less financial support. The process is cyclical and more dependent on financial circumstances than political persuasion.
Currently we are working in the latter scenario. The LGA estimate that funding from central government to councils will be cut by 43% over the course of this Parliament. Simultaneously, HM Treasury has reduced £7 billion of grant from ring-fencing each year. Councils currently have growing control over a shrinking pot.
Whichever scenario you favour, both only tinker at the margins of change. Fiscal autonomy of local government in the UK is tiny compared to similar nations. In terms of revenue raised from local taxes as a percentage of total revenue we are 21st out of a study of 24 nations. Also, UK authorities are solely reliant on property taxes (Council Tax and Business Rates) unlike other countries where councils have a claim to portions of income, sales and other taxation. When it comes to fiscal autonomy UK councils have a small amount built on a narrow base.
Harder to plan, prevent, integrate and grow
The current settlement makes it hard for councils to plan, prevent, integrate or drive growth.
Plan: Whether you prefer the ‘jaws of death’ or the ‘graph of doom’ demographic pressures and continued cuts into the next Parliament mean councils are in for a rocky fiscal road over the next decade. Being less financially beholden to central government would allow councils to plot their route through this difficult time in response to local context.
Prevent: Early intervention can save money and improve outcomes at the same time. The Government’s early intervention review suggests potential for a 25-fold return for small investment in life skills training. Councils can reduce their risk further through Social Impact Bonds, which we’ve blogged on here. But to invest (or commit to paying back investors) councils need to know how long, financially, they can wait for a return, or what return they can realistically provide an investor.
Integrate: Cutting duplication is another saving which doesn’t impact on outcomes. Again it improves them. Rolling out integrated savings through Community Budgets could save between £9.4 and £20.6 billion through reduced duplication and prevention. But to pool funding with partners, councils need to have a clear idea of what finance they can commit, over what timeframe. It’s hard to do this when the cheque from central government could fall without warning.
Drive growth: Britain’s economy is unbalanced in favour of London and against the North. The North of England’s output increased annually by 2.9% during the boom years of 1992 to 2007 compared to London’s 5.6%, exacerbating an already large gap. Local authorities can drive economic development across the UK. But in pressed financial times incentivising local action is essential. The Government’s Business Rate Retention policy is a welcome development but as Wilcox and Sarling argue, this amounts to less than income received from directly levied fees and charges so is relatively small beer. Increasing the fruits of economic development labour through further reform would be a step in the right direction.
Solutions and dangers
There is scope to increase autonomy. Multi-year settlements across a Parliament would help local authorities plan with confidence over a five-year cycle. Similarly, removing the planned reset of business rate retention which is due to occur in 2020 would prevent a slow-down in local economic development initiatives as the end of the decade approaches. Currently, as the IFS have argued, authorities have an incentive to stall developments into the next ten-year retention cycle so they get ten years of rate retention from that development rather than one or two.
Naturally with greater devolution comes concern ‘postcode lotteries.’ However, given the UK’s strong tradition of centrist policy making it is easy to envisage fiscally looser arrangements taking place within the context of a clear outcome-based steer from central government.
Getting there (slowly)
The UK lags behind globally in terms of the financial freedom it gives local government. Greater fiscal autonomy could lead to stable planning to better cope with economic cycles, savings and better outcomes through early intervention and reduced duplication, and more balanced growth across the UK. The Government’s City Deals, Business Rate Retention Scheme and creation of the Regional Growth Fund overseen by Local Economic Partnerships combined with increasing advocacy of five-year financial settlements for councils suggest a brighter future for increased local fiscal autonomy. However only time will tell whether we are witnessing the dawn of a new age or a temporary hiatus before returning to what IPPR terms the ‘persistent centralisation’ of UK public policy.