Funding formulas are back in the news

Cllr Sir Stephen Houghton says small steps can be taken to begin to fix a broken system of council funding. ‘For starters, there needs to be a proper recognition of deprivation in funding formulas.’

Following Birmingham's Section 114 announcement recently, the conversation in the news quickly moved to the situation facing the whole sector, and the need for the Government to look at council funding.

Funding formulas don't normally grab the headlines, but despite this they play an important role. They underpin vital services and therefore it is absolutely essential that we get them right so that funding is distributed in a fair and equitable way.

There's much debate about what should go into the funding formula for council funding. Anyone involved in the Fair Funding review will know there are numerous competing voices, as everyone tries to secure a bigger piece of the pie.

Most recently, the think-tank Onward published a report suggesting that there should be a greater focus on social mobility when allocating funding to councils.

But grant funding exists to provide councils with the means to deliver vital local services to their residents. Dealing with social mobility, which is clearly a significant issue, should be the responsibility of other funding pots that may specifically target this agenda. Any funding formula should be about the demand and cost of delivering services.

Yet the Government has not updated funding formulas for many public services in over a decade, and often the data used to assess relative need is much older than that.

Recent research by the Institute for Fiscal Studies illustrated just how mismatched public services funding has become to relative need. Local government was the worst victim, with a much more significant gap between share of funding and share of estimated needs. The research found that, in local government, the most deprived areas receive a share of funding that is 9% less than their share of estimated need, whilst the least deprived areas receive a share of funding that is 15% more than their share of estimated need.

This is not the sign of a funding formula that is fair or equitable. It is the mark of a funding formula that has failed. It is residents in the most deprived areas that suffer the most from this. Far from levelling up, the continued use of this broken and inaccurate funding formula acts as a roadblock to levelling up.

The fair funding review could deliver a fairer settlement for local authorities, but before it was delayed there were concerning reports that deprivation would play a smaller role, with sparsity growing in importance. Such a move would entrench the recent changes to the local government finance system, which have seen a growing gap between the richest and poorest areas. The result of this would be the opposite of ‘levelling up'.

At SIGOMA, we have spent the summer campaigning for fair, sufficient and sustainable funding for local government. It is clear we desperately need to fix the broken local government funding system. Funding formulas are the building blocks of this system. However, much like the physical infrastructure of our public services, they risk crumbling if left without intervention for a decade.

Small steps can be taken to begin to fix this broken system. For starters, there needs to be a proper recognition of deprivation in funding formulas. There is a well-documented link between deprivation and the demand for and cost of delivering local authority services. More deprived areas are likely to see much greater increases in demand for services such as adults social care and children's services whilst being less able to generate large quantities of income from council tax and retained business rates.

The sector is ready to continue engaging with government and to see a new and fairer formula implemented.

In the long term, consideration needs to be paid to how funding formulas will be kept up-to-date and remain fair to ensure that we are not having the same conversation in 10 years' time. If local government funding formulas were set by an independent body, like they are in Australia, they could remain up-to-date and consistent, resilient to political changes which have, in the past, dramatically changed the way local government is funded.

Cllr Sir Stephen Houghton is chair of the Special Interest Group of Municipal Authorities (SIGOMA)


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