A clearer path?

By David Phillips | 05 October 2021

Finally. A three-year Spending Review. After the self-inflicted shock of Brexit, and the global shock of the COVID-19 pandemic, understandably led the Government to implement two consecutive one-year Spending Reviews and finance settlements, we’re moving back to multi-year spending plans. This is something councils have been calling for. But it’s unlikely to bring funding certainty, especially at the level of individual councils. Instead, it’s an opportunity to bring some much-needed clarity to the Government’s approach to local government funding for the next three years and beyond. And sometimes clarity is more useful than certainty.

The Spending Review takes place at a time when the outlook for councils’ spending needs and income remains tied to the uncertain future path of the pandemic. Some additional spending – on PPE and infection control measures in adult social care, and contact tracing and outbreak management, for example – seem likely to be needed over the next few years, and income may not fully rebound if shopping and working habits have permanently shifted. But how fast and fully will these financial pressures abate? And will a new variant or waning protection from vaccines necessitate another lockdown?

Many council services have actually seen a short-term fall in demand during the acute phase of the crisis as people put off seeking help, or have been supported by temporary policy measures (like the limits placed on evictions). While we can be pretty sure demand will rebound, to what level is unclear: it’s still too early to tell what the longer-run knock-on effects of the pandemic for mental health, and families’ home lives and housing situations will be, and such effects could have significant implications for demand for a range of services.

This uncertainty means that setting firm plans for council funding for the next three years is an impossible task. Instead, the chancellor and the Department for Levelling Up, Housing and Communities should consider setting a baseline amount of funding (plus principles for council tax increases) for the sector as a whole, assuming COVID-related pressures largely abate over the next 18 months or so. But they should also set out how they would top this up in later Budgets (or even between Budgets) if the COVID crisis re-intensifies or has longer-running effects on councils’ spending needs or revenue-raising capacity. That would allow councils to plan spending on their core services over the next three years, provide them with a degree of assurance that funding will be forthcoming if needed, and minimise the risk of ‘locking in’ funding that may not actually be needed if COVID pressures abate. Clarity about the approach to funding the Government will take is likely to be more useful than certain, but potentially inappropriate, funding levels.

Councils also need clarity about how funding will be distributed. It seems highly unlikely that the Fair Funding Review will be completed in the next few weeks or even months, so I don’t think we can expect full details of how updated spending needs assessments and equalisation arrangements will affect different councils. But the Government should still use the Spending Review to answer some key questions:

• Will it continue with plans to move to 75% business rates retention?

• Will it undertake a full reset and redistribute funding according in line with assessed needs?

• What principles will guide transitional arrangements?

• How will incentives and needs be balanced going forwards?

It may be tempted to put off implementing the Fair Funding Review until after the middle of the decade: that could enable it to set firmer council-level allocations now for the next three years. But that would be a mistake. When allocating the first tranche of COVID funding last year and in this year’s Finance Settlement, the Government used social care spending needs estimates that were eight years out of date, and formulas originally estimated in the mid-2000s. That matters because populations and patterns of need have changed so much in the meantime – with the number of over 80s – a key social care client group – estimated to have risen by almost 30% in Newham but fallen by 12% in neighbouring Barking and Dagenham, for instance. It made sense to delay the review when COVID hit, and some elements will need updating and re-thinking in light of the impact of the pandemic. But sacrificing fairness for certainty and stability indefinitely is less defensible. A clear plan for how the finance system will be reformed is a better way forward.

Of course, the chancellor doesn’t just have to provide clarity when he stands up later this month. He also has to provide money. In new analysis we’re publishing today as part of the IFS Green Budget, we highlight how continued council tax increases of 4% a year may be enough to meet underlying spending pressures in the final year of the Spending Review, 2024-25. But that depends on a quite hefty increase in grant funding that would only be deliverable if the chancellor can hold down growth in NHS spending – which history suggests is difficult – or top-ups his overall spending totals. And unless COVID pressures quickly abate, he’ll need to find further billions over the next two years, and perhaps even for the latter part of this year.

It’s therefore clear that the chancellor has a tough task ahead of him – and we’ve not even mentioned reforms to social care funding. It’s unlikely he’ll be able to entirely satisfy councils. But he can and should signal a clear approach to dealing with uncertainty, reform and funding – so that councils can be better placed to plan for what will undoubtedly be a tough few years.

David Phillips is associate director of the Institute for Fiscal Studies

@TheIFS

News - Council tax could easily rise by 5% a year - IFS

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