IFS: A commitment to reform English councils’ funding is welcome, but the government must be clear about its expectations and objectives

The new government's commitment to reform the English local government finance system is welcome – change is long overdue.

A new report from the IFS, funded by the Health Foundation, examines the issues with current arrangements and the options for reform. It concludes that the government must be much clearer on both its expectations of local public services and the objectives of reform than it has been so far. If it is not, it risks undermining reform efforts, and potentially misleading councils and the public about potential impacts.

A government ‘policy statement' published at the end of November provided some information on its plans. Key will be updates to assessments of councils' spending needs and ability to raise revenues themselves, and a new system to allocate central government funding to councils that takes account of these assessments. This is long overdue, with funding currently based on a range of ad hoc decisions and data from as far back as the 1990s. Funding no longer reflects areas' populations let alone other socio-economic characteristics that affect local needs. In too many cases allocations are now essentially arbitrary, risking undermining efforts to tackle health and other socio-economic inequalities.

However, the government needs to be clear about its expectations and objectives for local government funding:

• First, it must be clearer about the range and quality of services it expects from councils, and how much it would reasonably cost to deliver these. It is not possible to assess what share of funding should go to each council without assumptions about the level of service provision: the relative needs of deprived and affluent areas will depend on the extent to which the services they are expected to provide are more universal or targeted in nature, for example. In the absence of estimates of how much it costs to deliver the expected range and quality of services, it is also harder for voters to hold the appropriate politicians to account for poor services: is it due to a lack of available resources, or poor local delivery?
• Second, it needs to decide whether accounting for differences in needs between areas is enough – or whether funding should be used explicitly to narrow inequalities between places. NHS funding formulas, for example, include additional funding for areas with poor health on top of funding to address the additional demand for services, with the aim of narrowing the gap with healthier places. Should such a needs+ approach be adopted for local government funding too?
• Third, it should recognise that there are trade-offs between different objectives, and be clear about which objectives it's prioritising and why. There is a trade-off between how redistributive a funding system is and the financial incentives it provides to councils to improve local socio-economic conditions. Careful design of the finance system can ameliorate but not eliminate these trade-offs, so the government will have to decide how much priority to place on these different objectives. It should communicate its choices – and the reasons for them – clearly to stakeholders, so they can properly engage with the reform process.

The report also discusses institutional changes that could increase transparency and improve accountability. This includes the potential role for an independent body to advise on both the overall level of funding and how it should be distributed between councils, and the possibility of new legislation requiring the government to ensure sufficient funding for councils to deliver the services it mandates they provide.

Finally, the report considers the range of revenue and spending powers available to local government. It finds that the evidence that devolution boosts economic performance is less strong than sometimes claimed. But there are feasible options if the government wants to give local leaders more discretion over how much is raised and spent in their areas, and more tools to shape local economic development.  

David Phillips, an associate director at the Institute for Fiscal Studies and an author of the report said:

‘The new government's plans to push ahead with English local government finance reform are welcome. This is long overdue and much needed. There will inevitably be losers as well as winners, but the current finance system is not fit for purpose, particularly in relation to how it distributes funding between councils.

The technical details of the reforms will matter. And plans for funding reform will have to align with plans to merge district and county councils in more rural parts of England to “simplify” local government structures.

But what matters most is a clear articulation of what services the UK government expects local government in England to be able to provide, and its objectives for a reformed system – including the extent to which it prioritises redistribution to poorer areas, versus financial incentives for growth. Without such information, it will be much harder for councils and other stakeholders to engage meaningfully with the reform proposals, and for citizens to hold both central and local government to account.'

Katherine Merrifield, Assistant Director in the Healthy Lives team at the Health Foundations said:

‘Councils play a critical role in shaping health in their local areas by influencing the building blocks of health through things such as decent homes, good schools, public transport, and green spaces. 

This important report shines a spotlight on how local government funding is not fit for purpose. Without changing the arbitrary funding allocations that are currently in place, councils will be unable to reduce the inequalities that exist between those with the best and the worst health. The government should use its planned reform of local government finance to rebalance how funds are allocated, and follow a pattern of assessed need for the range of important services that councils provide.'