Place leadership – moving us out of first gear | Cllr James Jamieson, chairman, Local Government Association
Place leadership – moving us out of first gear
Speculating on the potential future of local government finance has tended to be a fruitless exercise in recent years. Unforeseen events create unexpected new pressures and demands. Existing strategies and plans are changed or delayed. The sector adapts and innovates, often introducing new financial strategies and measures that could not have been anticipated.
In this context I am going to avoid crystal ball-gazing. Instead, I want to focus on a number of key financial issues that must be addressed going forward if local government is to be on a financially sustainable footing by 2030. These key issues reflect the fact that the world has changed dramatically over the last 15 years. Not only have councils faced a decade of austerity, but there is also no certainty of future funding, and council tax is subject to referendum limits. We are subject to bidding for multiple pots of money and councils have less control over their finances than at virtually any point in history. Councils operate in an uncertain, short-term financial context but, as with the country as a whole, we need to invest for the long term and to be able to plan for five years or more.
There has also been a fundamental change in demand on councils. 15 years ago, social care represented less than 50 percent of council expenditure, but it is now approaching 70 percent for the sector and growing. This is a fundamental difference. For many councils a significant majority of their expenditure is on statutory services, and the only way they are managing the budget is to ration even statutory services. And then we have had Covid, Ukraine, the cost-of-living crisis, and a housing crisis.
There needs to be a fundamental rethink of council funding, which is linked to the underlying change in demand for council services. Council tax, while a reasonable funding stream for things like roads, waste, and planning, is not appropriate for social care, where demand is growing substantially faster than the council tax base and there are huge differences in demand between councils. Funding needs to be aligned to underlying demand pressures.
With the UK debt reaching 100 percent of GDP and the tax burden at its highest in decades it is unrealistic to expect substantial increases in government expenditure. But there is a way out, and that is based on genuine place-based devolution. Councils are the most effective part of government and making decisions on a local basis delivers better outcomes. It is heartening to see a commitment to greater local decision-making across the national political spectrum and I will continue to press for good intentions to become reality for our communities.
If we are to have genuine devolution, councils need to be in control of their own financial positions, not reliant on bidding for multiple pots. Many of these pots are focussed on growth and levelling-up, so why not enable councils to benefit from doing the right thing? Increased tax revenue from growth should be shared with councils. But devolution also means making more decisions at a local level, which means devolving decisions and funding on things like skills, transport, education and health to the local level.
In this context there are three priorities that need to be at the heart of a long-term strategy for local government. First, there needs to be reform within the local government finance system both to increase the quantum of funding available and, just as importantly, to create greater certainty to allow councils to plan effectively. Second, a financial solution needs to be found in relation to adult and children’s social care as they now dominate local government finances in a way that was not the case 10 to 15 years ago, restricting councils’ capacity to deliver other services that are highly valued by residents. Finally, financial reform needs to be built around further devolution. Local leaders know how best to spend resources locally.
Reforming the local government finance framework
Local government has yet to recover from the austerity of the last decade in which £15bn of government funding was stripped from the sector; a far higher relative cut than experienced by health bodies or the education sector. Growing service demand in areas such as social care and homelessness has added further financial pressure, a process that has been exacerbated by recent soaring inflation. In this context there is a strong case for financial reform that addresses the severely under-funded position local government now finds itself in.
Councils also need a financial framework that provides certainty. 2023/24 is the fifth consecutive year councils have received a one-year settlement. And this is within a context of delay over significant financial reforms including the business rates reset, further retention of business rates, the Fair Funding Review, and reforms to other grants such as the New Homes Bonus. The resulting lack of certainty for councils hampers their financial planning and weakens their ability to secure financial sustainability.
Council tax and business rates reform
While council tax is now a substantial element of council funding, it is not the answer to the underfunding issues the sector faces. Councils are keenly aware that council tax increases add an extra financial burden on already struggling households. In addition, it raises different amounts of money in different parts of the country unrelated to need and it would fall short of the sustainable long-term funding that is needed.
Notwithstanding the limited potential council tax has to resolve the sector’s financial challenges there are still strong grounds for reforming important aspects of the current council tax framework. Referendum limits should be abolished so, when the time is right, councils and their communities can decide what increase in council tax is warranted to help protect or improve local services. Councils should be given the powers to vary all discounts including the single person discount, which is worth around £3bn a year.
Business rates, which fund a substantial and growing element of council funding, have been the subject of significant unresolved debate and review in recent years. In the continuing absence of substantive reform there are nonetheless important changes that the government could make to the current framework. These include allowing councils to set their own business rates multiplier, giving councils greater flexibility on reliefs, and undertaking a review of exemptions to help reduce avoidance rates.
Alternative funding sources
There needs to be some consideration of alternative forms of income for councils such as a tourist tax or an online sales tax with the funding retained by councils to supplement councils’ existing funding streams. It was disappointing that at the 2022 Autumn Statement the government decided not to introduce an online sales tax. The LGA supported the consideration of an online sales tax, particularly as it would help to spread the range of the tax base for business taxes.
A place-based and preventative funding model
There must also be a move away from piecemeal pots of funding allocated through wasteful competitive bidding processes. Government should instead adopt a place-based approach in which funding is aligned with local needs and opportunities. Bringing budgets together into one place has the potential not just to tackle the immediate problem of fragmented local government funding, but to go further and help develop a national model in which money is allocated to places and not departmental silos. The forthcoming funding simplification plan will be an important step to streamline the current approach across Whitehall.
A place-based approach should be accompanied by a renewed focus on prevention, backed by government investment to address existing and future demand for services such as social care, homelessness support and community safety. This would also lead to saving elsewhere in the public sector such as the NHS, employment support and the criminal justice system.
Distribution of needs and resources
The government stated in the Autumn Statement 2022 that the Review of Relative Needs and Resources will not be implemented in the current Parliament. It is essential that when the Review does take place it considers both the data and the formulas used to distribute funding and the government. Meaningful reform can only be built on the basis of a clear understanding of the distribution of needs and resources locally. Government must also ensure that any resulting changes from the Review do not see individual councils facing reduced funding.
Securing certainty
Addressing the above issues will help provide councils with greater financial certainty, giving them a greater degree of control over council tax and business rates income and the potential to raise funding from new income streams. But many funding decisions will remain with the government. Consequently, any reform package must include timely multi-year settlements to allow councils to plan and make meaningful financial decisions that improve value for money and financial sustainability.
Addressing adult and children’s social care financial pressures
Steadily growing demand means councils with responsibility for children’s and adult social care now devote nearly two-thirds of their total spending to these services. This demonstrates councils’ commitment to protecting these crucial services, but it comes at the expense of funding for other important services. Ultimately the enormous and increasing scale of the social care challenge facing councils as a result of demographic pressures continues to threaten their ability to deliver services and investment for residents. This is completely unsustainable. A solution that both ensures that users of social care services get the help they need and reduces the pressure these services exert on councils’ wider budgets must form a central component of any programme of local government finance reform.
Adult social care funding
Adult social care services have faced a decade of underfunding accompanied by growing demand now exacerbated by inflation. The LGA has called for an additional £13bn in recognition of the severity of the pressures faced by councils. This includes £6bn to stabilise the sector in the short term by addressing current inflationary and demand pressures.
A further £7bn is needed to enhance capacity so that councils can deliver the range of statutory duties under the Care Act. This remains a well-supported piece of legislation, but its full intent has never been realised owing to funding pressures since the Act’s implementation in 2015. This is particularly true in respect of social care’s wider preventative duties and the role it plays in supporting discharge and helping people recover from time spent in hospital. This includes addressing historic under-investment in areas such as supported housing, tackling unmet need, and in recovery services such as enablement and intermediate care offers.
Children’s social care
As with adult social care, children’s social care is exerting a growing pressure on councils’ finances. Councils spent over £10.5bn in 2020/21, nearly 25 percent more than in 2016/17. But this has not been enough to meet the impact of rising demand and rising costs. LGA analysis indicates that the service faces an existing annual shortfall of £1.6bn simply to maintain current service levels. Current funding levels are also insufficient to secure much-needed reform in the sector. The 2022 MacAlister Review costed these reforms at a minimum of a further £2.6bn over four years before inflation.
Devolution
I believe that the stark fiscal context facing the country strengthens the need for a radical re-investment in local devolution, drawing on the lessons of Total Place, Whole Place Community Budgets, the Supporting Families programme, and others, to reform public services and better align scarce resources with the needs and aspirations of local communities. Genuine devolution must mean greater fiscal freedom, the power to raise more money locally and have greater control over how this money is spent in local areas. We eagerly await government’s ambitious ‘Trailblazer’ deals with Greater Manchester and the West Midlands which lay the groundwork for this to become a reality and look forward to government opening this opportunity to other areas in the near future.
Fiscal devolution
The UK continues to be an international outlier, one of the most fiscally centralised countries in the developed world. Local authorities in Germany, Switzerland and the Netherlands can access a diverse range of revenue sources. They are also able to adjust and introduce local levies in consultation with their residents and businesses, innovating and diversifying their tax base in response to new public priorities. By contrast councils in England are only able to levy two taxes: council tax and business rates. Both are subject to significant intervention and control by Whitehall and both stand increasingly exposed in the light of long-term changes in home ownership and business composition, such as the rise of e-commerce and the growth in microbusinesses.
Devolution of powers and freedoms
Devolution should be at the heart of our national plans for growth. Sub-national government expenditure on economic development should be brought into line with our major international competitors, such as Germany. And councils should be given the tools and resources they need to drive growth and address regional imbalances in productivity by delivering on the commitment to offer every area in England that wants one a devolution deal by 2030. In addition, in line with National Highways, Network Rail and mayoral combined authorities, councils should be given 5-year allocations for highways and local transport capital and maintenance programmes.
Leadership of place
Due to its place-based leadership role, local government is uniquely positioned to invest in sustainable preventative approaches that save money for other parts of the system. No other part of the public sector offers the same scope for unlocking savings in the NHS, the Department for Work and Pensions and the criminal justice system. Through targeted investment in social care and children’s services, public health and unemployment support councils can transform people’s lives and move away from the costly pressures of acute intervention. This has already been demonstrated where devolution of health and social care has taken place. To capitalise on councils’ capacity to act as place leaders the government should pilot a new approach to public service investment, by asking areas to come forward with radical proposals to bring together budgets and public services under the leadership of local government.
Conclusion
While crystal ball-gazing is always difficult, the one certainty is that the current situation is unsustainable. If we do not change the way we finance local government and provide adequate, independent and long-term funding we will see increasing numbers of councils in financial difficulties as they are squeezed between inadequate funding and statutory obligation. But by addressing the three issues I have set out, the sector will be in a fundamentally stronger and more sustainable position. This will have significant benefits not only for local service users, which include some of the most vulnerable groups in our society but will also support national agendas on areas such as housing, growth, and support for the NHS. Ultimately, if we do not do justice to the financial needs of local government then the risk is that these efforts will remain stuck in first gear.
Cllr James Jamieson is chairman of the Local Government Association