Fixing local government’s financial plumbing

By Lizzie Insall | 12 October 2020

The COVID-19 pandemic has highlighted the dysfunctional relationship between central and local government. An excessively centralised approach to contact tracing flies in the face of the approach taken in other countries more successful at controlling the virus. Meanwhile, the broader policy failure to contain the virus loads costs on to already depleted local government budgets, undermining the sector’s ability to serve its citizens.

But this is not a new dynamic. A vicious cycle of constrained autonomy and reduced resources for local government has, for many years, undermined local government’s capacity to respond to emerging policy challenges. As a result, policy formulation becomes ‘central by default’, further exacerbating the problem. Policy outcomes for citizens and taxpayers deteriorate.

How local government is funded lies at the heart of the problem. Beyond simply a distribution of resources, the funding framework underlies the entire relationship between central and local government, but also between local government and its citizens.

Local government has two roles: the delivery of centrally prescribed services locally; and, as a local democratic body, responding to citizen needs and aspirations. The funding framework erodes the second role through its prioritisation of the first.

Over the past decade, central Government grants have significantly reduced so that locally retained taxation makes up the vast majority of local government revenue.

However, central Government prescription of what local government delivers has not declined. As a result, locally retained taxes are the primary source of funding, but central prescription dominates the use of those funds. Local discretionary activity has been crowded out.

What discretion there is belongs to central Government. Its ability to open up new, often ringfenced, funding streams is the only way for local government to access further funding. Their pursuit of this funding distorts local government focus and creates a dynamic in which local government’s primary ‘customer’ is Westminster, rather than its own citizens. Short-term funding arrangements from Whitehall exacerbate the problem, undermining local service delivery know-how and strategic planning.

The mirage of local government autonomy does not end there. While local government has limited power over its spending, it also has limited power over its revenue. The localisation of revenue sources has not equated to the localisation of authority over them. Local government is a recipient rather than a setter of taxes, a passive position which undermines local accountability.

The inevitable result of this perverse financial plumbing is a disempowered local government, underserved citizens and wasted public money. The lack of autonomy and accountability not only damages practical outcomes, it also creates communities who feel they have no power. That the need to ‘level up’ is a national responsibility is in part a feature of how disempowered local government is to invest in place.

Too often the debate about local government focuses on the need for more funding. The need is clear, but the source of the problem is more fundamental than something that can be solved simply through a slightly more generous funding round for town halls.

Instead, the sustainable solution lies in fixing the plumbing of local government finance. This means clearly distinguishing between the two roles of local government and reforming funding to drive accountability and autonomy. Two principles are key to achieving this goal: 1–Local government should be fully funded by central Government to deliver the services that central government requires it to provide. 2–Local government should be given broad scope to raise revenue from its own tax base along with autonomy over how that money is spent, accountable to its own citizens for its decisions.

These principles should be applied together to ensure that local government is both able to deliver the services that central government demands and fulfil its role as an empowered place-maker – building the local economy and shaping the identity of a place. More local revenue or powers in the abstract will never resolve the blurring of central government requirements with local taxation, which lies behind the drift towards centralisation by default.

These principles, if implemented, offer a way to free local government from central control and to give it the tools and accountability to work for its citizens.

Lizzie Insall is policy lead, community, at the Tony Blair Institute for Global Change


Fixing the Plumbing: Resetting the Framework of Local Government Funding

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