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A bigger picture for financial reform

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Major changes are afoot in English local government finance. The Fair Funding Review will see new methods and formulae to redistribute funding between councils according to their assessed spending needs and revenue-raising capacity. The expansion of the business rates retention scheme is likely to see the abolition of revenue support grant. And changes to the adult social care system could have big impacts on the cost of the system and how it is financed.

In all these areas, the details matter and local government will need to engage with them. As forthcoming work by colleagues and I will show, the details of how spending needs and revenue capacity assessments are updated – the methods, years of data and local indicators used – can have a major impact on the funding outcomes for different councils.

But local government finance reform isn’t a purely technical exercise. Indeed, it’s not really just about finances. It speaks to big questions about the kind of country we want to be – and the kind we think we are. While paying attention to the details, we shouldn’t lose sight of the bigger policy questions at stake. Looking at the two together is the aim of my chapter in the British Academy’s new book, Governing England: Devolution and Funding.

The starting point is the inevitable tension between various public policy objectives. On the one hand, we have the ‘devolution revolution’: a shift in funding towards local taxation aimed at giving councils stronger incentives to boost local economies, and to become more financially self-sufficient; city, devolution and growth deals that come with new responsibilities and powers over additional areas of public spending; councils pushing to go even further with tax and spending devolution.

On the other hand, increasing central government intervention in major local services seems driven in part by a desire for greater consistency in service provision across the country. In adult social care that means common care-needs assessment processes and minimum eligibility criteria, new statutory duties, and increasingly ring-fenced funding. For schools, the push for a national funding formula to replace the various formulae that councils have devised themselves.

This tension is between two worthy objectives. First, a desire for more accountable local government with more policy discretion and better aligned financial incentives for improving local outcomes. Second, at least for some of the biggest and most politically sensitive service areas like schools and adult social care, a desire for more consistent levels of funding, and access to, and quality of, service provision.

As with many things, you can’t have your cake and eat it. Choices will have to be made about whether to prioritise local responsibility and discretion or national standards for different public services. And then make sure the funding system is consistent with the policy aims.

Four broad options for the funding of local public services exist. All involve either substantial tax rises in the coming decades, or a significant further paring back of local public services.

Option one would be to broadly continue with current policy, with local tax revenues topped up by increasing ring-fenced grants for priority areas like social care. This would likely result in a creeping centralisation of the funding of these areas, with the advantage of easing their exposure to the revenue risks associated with business rates retention. But in the medium term we’d be left with the tension between wanting national standards but still having locally varying funding.

The second option would be to resolve this tension fully by entirely ring-fencing and/or centralising funding for these services in one go. But that would have its own problems. Money would need to be found – likely by top-slicing local tax revenues – to fund these services. Transitioning to new centrally determined funding allocations could be difficult: there would likely be big losers alongside big winners. And local councils could be left as little more than refuse collectors and pension funds. On the other hand, could it facilitate the integration of social care with health services?

The third and fourth options involve genuinely embracing the ‘devolution revolution’. Additional no-strings funding could be provided to councils, allowing them to set priorities based on their view of local preferences and needs. They’d be held to account at the local ballot box. Councils could be given greater control of local schools spending – reversing decades of policy – and health spending – perhaps another route to better service coordination. And to pay for these broader responsibilities, much more ambitious tax devolution could be considered: a local income tax, anyone? Of course, all this would mean accepting that local discretion and responsibility could lead to different types and qualities of services in different parts of the country.

The details with all such plans will matter. But the big picture of what we want to achieve with local public services has to come first – and needs to be properly debated. As the government reforms local government, social care, schools and health funding, it is time to have that debate.

David Phillips is an associate director at the Institute for Fiscal Studies. A version of this article appeared in The MJ.

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Book chapter
The financing of local public services involves a potential trade-off between the equalisation of funding between areas and the provision of fiscal incentives for economic growth. It also involves trade-offs between local discretion and national service standards. This chapter of the British ...