Money talks

By Dan Peters | 08 February 2017

Local government is balancing on the precipice of a massive change to the way it is funded.

Full retention of business rates is on its way but there is a risk that, with one eye on that prize, some parts of the sector may not even survive to 2020.

After years of cuts that have largely gone unnoticed by the public, the whispered conversations in town hall corridors have involved speculation about when this will change.

This is now the fifth year we have carried out our annual finance survey with the LGiU think-tank and the 163 responses we received from 131 councils across England therefore act as a useful barometer of views.

That crucial proportion of key council decision-makers – chief executives, finance directors and portfolio holders, and leaders – who believe the public will notice the cuts to frontline services in the coming years is rising.

It has crept up further this year – from 37% in 2015 to 42%.

One London cabinet member for finance said: ‘We are facing an extraordinary decline in our grant income over the next two years, which will make it extremely hard to sustain frontline services and fulfil statutory responsibilities by 2020, especially in light of rising pressures on demand-led services.

‘I think the next two years are the last two where councils will be able to just about get by.’

Reacting to the results, president of the Society of Local Authority Chief Executives, Jo Miller, said: ‘We shouldn’t be surprised that it is getting increasingly tough. This year and next year are the toughest years.’

That brings us to two more key figures from our survey – four out of five respondents have none or very little confidence in the sustainability of local government finance though a much lower – but still significant – 13% admitted there was a danger they would no longer have enough funding to fulfil their statutory duties in the coming year, with almost half of those based in the South East.

Chair of the Communities and Local Government Committee, Clive Betts, said the 13% figure was ‘worrying’ though senior Whitehall officials insist they ‘keep a very close eye on the overall risk across the system’.

That risk is only going to grow with the move to 100% business rates retention, which nearly 50% believe they will lose from and some fear will be ‘just a funding transfer rather than transformative’.

On top of this, the uncertainty of what resources will be available makes long-term planning impossible.

Add to this the unknown impact of Brexit on the UK economy and council income expectations, and the picture becomes even murkier – though already 39% believe the decision to leave the EU will have a negative impact on their upcoming budget.

The sector is certainly sceptical, with one borough council chief executive describing the assumption that growth in business rates will compensate for loss of grant as ‘unrealistic’.

Some 37% believe 100% retention will fail to incentivise local economic growth or at least the type that will make a difference to their finances in a global and digital age.

‘The mechanism when agreed will look like good news but in reality be more of the same – local services paid for by local taxation or not at all,’ said one district council chief executive.

Another said rules placed around the system by governent meant it was ‘not true 100% retention’ while one Conservative council leader predicted Whitehall would ‘take the opportunity to increase burdens by a greater amount than the increase in funding’.

‘It may be impssible to devise a system that both deals with varying need across authorities while retaining a local incentive for growth,’ pondered one chief executive.

‘It is the worst possible system for funding social care and other such pressures, which are not related to business costs.

‘It is also counter-cyclical – business rates income will fall in a recession just as needs and demands upon services go up.’

It is no secret that adult social care is the greatest immediate pressure on council finances – so it is unsurprising that four out of five of those eligible said they were likely or very likely to take up all or some of the increased precept – up from just 44% last year.

That said, nine out of 10 railed against the concept that additions to council tax are a viable way of addressing the gap in social care funding in the long-term.

Head of local government at trade union Unison, Heather Wakefield, said: ‘This survey shows – if proof were needed – that councils are having the worst possible time. Every year their finances are becoming more precarious. Demand for local services is growing but local authorities have fewer than ever resources at their disposal.

‘Adult social care is giving local authorities the biggest headache. The Government’s response has been totally inadequate. Rather than allow councils to raise a little more cash from council taxpayers, ministers should instead be funding care properly – not forcing councils to provide care for the elderly and disabled on the cheap.

‘Councils will have £2bn less funding next year following the cut in revenue support grant after taking into account the small increase in business rates income. This hit to council coffers will mean higher charges for local residents and yet more cuts to local services.’

Indeed, an overwhelming 94% said they would increase council tax in 2017/18 – a proportion that has shot up from the tiny 5% in 2012 when Eric Pickles’ freeze grant was available.

No one this year said they would be reducing their bill and three-quarters called for the requirement for a referendum for council tax increases above 2% to be scrapped – up from 62% in 2015.

Even pushing up council tax fails to cure the financial headache suffered by many. A huge 94% said they would use increased charging to fund their 2017/18 budget – up from 86% in 2015 – with a quarter admitting that more than 5% of their 2017/18 budget would be funded in this way.

As well as charging, nine out of 10 believed it was a high priority or essential for their council to explore other sources of income. And almost half want increased powers over charging and trading while 39% want to be able to riase locally-specific taxes.

After digesting the results, president of the Association of Local Authority Treasurers Societies, Duncan Whitfield, said: ‘The survey confirms the boundless ability of local government to adapt to changing financial environments, but the warning signs are clear that that job is becoming harder each year and service delivery will inevitably be compromised.

‘Let there be no doubt that while charges and commercialisation may help, they cannot cover off fully the budget pressures that are out there.’

In short, the message coming loudly from our survey results is that the drive for fiscal devolution must go way beyond 100% business rates retention.

It seems that sustainable local government also needs a fair funding reset and new, broader local taxes.

As Ms Miller said at the committee stage of the Local Government Finance Bill last week, if there is an opportunity for other types of fiscal devolution then the sector should ‘grab it with both hands’.

The key point being, the sector may have to first create that opprtunity for itself.

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