Taking the strain – securing the sector’s future financial sustainability | Abdool Kara, Executive Director, National Audit Office
Abdool Kara is an Executive Director at the National Audit Office (NAO). This essay reflects the author’s personal opinions and does not represent the position of the NAO in any way.
A collection entitled “where will local government finance be in 2030?” gives contributing authors a choice – to write about what we ideally would like the position to be in 2030, or what we think it actually will be? I will be taking a ‘could’ rather than ‘should’ approach, considering changes that stand a chance of becoming reality, and not a wish list of radical but unlikely options.
The starting point is, of course, that the way the sector is funded is a mess; in fact, local government funding is a lot like the House of Lords – most everyone agrees that it is out of date and needs to be reformed, but it’s challenging to get agreement on what that reform should look like. Nobody can argue, however, that any reform of local government finance should seek to improve value for money for tax payers, ensuring their money is spent wisely especially in hard times whilst also building the financial resilience of the sector.
So, to aid the debate, I will set out some areas where I think the door on change is somewhat ajar, or at least not bolted shut, and there is a reasonable chance of positive change by 2030 – if not by the current government, then by the next, or perhaps the one after that.
Spoiler alert – in summary, I expect the 2030 local government finance system to look a lot like todays. Given that the current government has shown little interest in fiscal devolution (though we await the Greater Manchester and West Midlands trailblazer devolution deals), and that the Labour Party have indicated no significant devolution of fiscal levers should they win the next election, we can expect few truly radical changes. But crucially, this doesn’t mean that the sector can’t be in a much healthier financial position than it is today.
The only place to start is with adult social care (ASC). Simply put, local government’s finance system cannot be sustainable until ASC funding is resolved. The good news is that it is near impossible for an incoming government not to have this as a priority. Sadly, this will probably be framed in terms of the highly visible impact the funding deficit has on the NHS. But at least the consequence of such framing is the likelihood of a practical proposal to solve the ASC problem.
Given this, the sector is in a strong position to argue that funding social care largely from property taxes (both household and business) is unjustifiable given the inverse relationship between need and funding raised, so government will need to identify an alternative, whether through taxation, national insurance, or a mandatory personal insurance scheme. Such an injection of funding for local government (which should of course continue to be the commissioners of ASC) will help not only solve the ASC and NHS issues but reduce the crisis in other underfunded local government services. And if of sufficient quantum, it could release funds for councils to invest in other much needed areas, for example new housing and achieving net zero. The latter in particular would be a win-win-win, for the sector, for the planet, and for the government brave enough to make it happen.
If ASC can be solved through a national intervention, what about local taxes? Let’s start with council tax (CT). Again, I believe that we are unlikely to get to 2030 without revisions to CT arrangements, but let’s be clear, CT isn’t going away. Property taxes (including business rates) are the easiest to calculate, collect and administer, so no chancellor is going to remove them, though all want to tinker with them, not least because of the extensive lobbying against them, a consequence of their very visibility.
But there is now widespread understanding that CT is a regressive system, within council areas and also across the sector as a whole. So, we could see the introduction of new CT bands at the top end, to reduce this regressive effect. Moreover, it would be rational to do this alongside the long-delayed revaluation of property values. However, the likelihood of there being significant winners and losers (both households and councils) from this will ensure that significant transitional arrangements are put in place to dampen the degree of change being triggered – it may take several years for a government to allow the stagger to unwind.
And what of that other great local property tax, business rates? All parties indicate a desire to review business rates, but the logic of property taxes will always win out, and they will remain in one form or another, whatever a manifesto or minister might promise otherwise. No doubt there will be much tinkering at the edges, around reliefs, use classes etc., but I envisage a broadly similar system in 2030 to that in place today.
More interesting is whether the incentive to grow and retain business rates locally remains. The challenge here is that the two key guiding principles are both unarguable whilst pulling in opposite directions: geographically differential economic growth rates demand a redistributive mechanism; but local retention of business rates provides strong incentives to drive local growth. So, the question is whether it is possible to design a system that can do both. The current system not only does this badly, but it also actually runs the risk of ever-delayed resets because it is too difficult politically to appease the losers from such resets. But I don’t think that it is beyond the wit of humankind to devise a system which better balances these requirements, and fully expect to see this in due course.
Having dealt with ASC and the two main local property taxes, what about other forms of local income? The key here is that the sector needs to, and has a good chance of, establishing some key principles with an incoming government. We may not get the constitutional settlement between local and central that Gordon Brown has called for, but I think various agreements can be reached.
The first would be that fees and charges for services where punters have choice (e.g., leisure centre use), should always be set locally. Secondly, where fees are set by central government, no fee should be set such that services are run at a loss locally, in other words, such that local people subsidise service users. Planning application fees are a great example of a hidden subsidy from (on average) poorer local residents to (on average) richer local residents or developers – this is just wrong.
Thirdly, additional fees and charges at the margin should be allowed, e.g., a tourist tax. This may not raise much funding in some places, but it is clear that tourism places demand on local services (e.g., litter collection) and on the upkeep of local cultural and heritage assets, and these costs should not be subsidised by local people who are (on average) less well off than the tourists. There may be similar compelling arguments for other tactical new taxes to be established.
Lastly, there is an opportunity to get the ‘New Burdens Doctrine’ onto a stronger, statutory footing, that would enable judicial review of allocations being made under the doctrine. This could be a key step in the local government funding landscape going forwards.
Having covered locally raised funding, what about revenue grant funding from central government? It is highly likely that a new government will swiftly conduct a fair funding review unless it is a hung Parliament. Given recent criticism of ‘pork barrel’ politics, such a review will receive significant scrutiny, and the government of the day would be well advised to design this review transparently, in close consultation with the sector, and with independent advice from the likes of the ONS. Anything else runs the risk of overwhelming challenge from the sector and other stakeholders, and then being undone immediately by the next government.
Regardless, a return to something like the revenue support grant, which compensates authorities according to their ability to raise funding locally, seems likely. Of course, if ASC is (largely) being funded through a separate mechanism, then the stakes, as well as the quantum of funding, are lower, and the change process stands a greater chance of success.
So far, I have covered the revenue elements of local government funding, arguing that changes will largely be evolutions of existing mechanisms rather than revolutions. In contrast, it is on the capital side of the budget where I believe we may see more radical change.
There is growing debate about the proportion of increased value retained by landowners where a change of use, usually to housing, is agreed through the planning process. Most other western nations have a land value uplift capture mechanism, and I can foresee a near future where the UK will introduce similar. Given that taxing wealth is more economically efficient than taxing income, this may be the first step a new government takes in that direction. Generating more funding than s106 agreements and Community Infrastructure Levies, it would reduce public liability for infrastructure spend, whilst also potentially raising further capital funds to support the ‘green transition’ towards a net zero future. And as an aside, it could also dampen new house prices through lower contributions to infrastructure costs than under current arrangements.
Before concluding, it’s worth highlighting some core National Audit Office messages that are relevant to this essay. Value for money, and therefore financial sustainability, requires longer-term funding arrangements, so we recognise the inefficiencies of short-term, stop-gap, and top-up arrangements, as well as of the many ‘tournament’ funds that have appeared in recent years. Such a longer-term outlook from central government would also enable a transition from crisis management towards prevention, early intervention, and better demand management, particularly in high-cost, responsive services such as adult and children’s social care, and homelessness. And greater financial sustainability makes for greater sector resilience, which in turn enables local government’s leading role in supporting local communities, particularly in times of crisis, as we so clearly saw during the Covid-19 pandemic.
So, in conclusion, can we look forward to a future where ASC is fully funded but not by local government; council tax is no longer regressive; business rates growth is both incentivised and redistributed; fees and charges are not subsidised by the general tax payer; new burdens are fully funded (and challengeable if not); grant support from government is set on an independent, rational basis; and communities as well as land-owners benefit from development? I don’t see why not – none of what I have set out would be beyond a new government of whatever persuasion, assuming a reasonable majority.
If this turns out to be largely what local government funding looks like by 2030, I think there is every chance that the sector’s future financial sustainability is indeed secure.
Abdool Kara, Executive Director, National Audit Office