The IFS's David Phillips: Hammond offers investment and austerity

In this article, originally appearing in the Local Government Chronical, IFS senior research economist argues that while compared to the big changes to local government finance confirmed last year - including the moves to 100% business rates retention in England, the Social Care Precept, and the Improved Better Care Fund –, this year’s Autumn Statement looks like less of a deal for councils, a closer look shows more money for investment, but a continued challenging environment for day-to-day spending.

The big headline from [last] Wednesday’s Autumn Statement was a significant upwards revision to government borrowing forecasts over the next few years. Gone is the £10 billion surplus the Office for Budget Responsibility (OBR) was forecasting for 2019–20 back in March. Now the government is forecast to be borrowing £22 billion in that year. The new plan is to get back into surplus as soon as possible in the next parliament – although borrowing is still forecast to be £17 billion in 2021–22.

The single biggest driver of higher borrowing is a forecast economic slowdown, following the recent vote to leave the EU. Coming on top of already weaker-than-expected revenues so far this year, this slowdown is expected to depress tax revenues and push up social security spending. On top of this, the Chancellor has decided to loosen the purse strings a little over the next few years with a boost to capital spending that grows to £5.5 billion a year by 2020–21 and a projected £7 billion a year in the first year of the next parliament, 2021–22 (although interestingly, the OBR thinks it is unlikely the government will actually spend all this extra money).

What does this all mean for councils?

First, some of the additional capital spending will be coming councils’ way. A new Housing Infrastructure fund, starting at £60 million next year, and growing to £1.4 billion in 2020–21 will be available to councils to provide infrastructure targeted at unlocking new private house building in areas with high housing demand. Councils will have to bid for this funding on a competitive basis. The Autumn Statement says the government may also change how existing transport funding is allocated in order to better support housing growth – which may involve some areas winning and other areas losing.

Second, while there is a boost to capital budgets, little new money has been found for budgets for day-to-day resource spending in the short-term, although £1 billion of the £3.5 billion planned but unspecified cuts in 2019–20 will be recycled into priority spending areas, rather than being used to bring down the deficit. Looking further ahead, the government has actually pencilled in yet another year of austerity in 2021–22: resource budgets had been planned to rise in line with the economy that year but will instead be frozen in real-terms. Indeed, getting back to the budget surplus eventually planned may require an even longer spending freeze. And pressure to increase budgets for some services, like the NHS, may mean cuts are required in other areas to deliver the overall freeze.

Councils in England may think they are out of the woods on that front, as by 2020, general grant funding is set to be abolished, and councils will instead rely on business rates and council tax. However, it is possible councils could still be impacted. First, because the government could always devolve additional spending responsibilities without full funding – forcing councils to make up the difference from their own revenues. Second, because the government could impose a net business rates income ‘tariff’ on the local government sector as a whole, withdrawing some money from the business rates retention scheme.

Third, councils own costs and revenues could be affected. An increase in the National Living Wage to £7.50 an hour will increase labour costs in some areas, including social care (where there are many low paid workers). Councils’ petrol will be a little cheaper following a further fuel duty freeze, but their insurance will likely cost more as a result of an increase in Insurance Premium Tax. Forecasts for business rates have been revised up slightly as a result of an increase in forecast RPI inflation (which the business rates multiplier is indexed to, by default).

Fourth, the Autumn Statement confirmed that the government is still open to devolution. New deals are proposed with the West Midlands, Greater Manchester and London – including the devolution of adult education budget to the latter in 2019–20. Combined authorities will gain borrowing powers, subject to a cap. And the government will consult on new borrowing powers of up to £1 billion for councils at a rate of gilts plus 60 basis points for high value infrastructure projects. This is cheaper than standard loan rates (from either the private sector or the Public Works Loan Board).

So while compared to the big changes confirmed last year – including the moves to 100% business rates retention in England, the Social Care Precept, and the Improved Better Care Fund –, this year’s Autumn Statement looks like less of a deal for councils, a closer look shows more money for investment, but a continued challenging environment for day-to-day spending. 

The article was originally published by LGCplus (the Local Government Chronicle).