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New proposals for council funding formula would hit deprived areas

Neil Amin Smith, Tom Harris and David Phillips
Press release

The Ministry of Housing, Communities and Local Government (MHCLG) is seeking views on the approach to measuring the relative needs and resources of local authorities. This consultation will close on 21 February 2019. IFS researchers Neil Amin-Smith, Tom Harris and David Phillips have submitted evidence.

Their analysis suggests proposals by the government to base assessments of councils’ needs for spending on services like homelessness prevention, public transport, waste collection, libraries, and planning on population only would shift funding from councils serving deprived areas to those serving more affluent areas. The government had previously suggested that deprivation could be included as a factor in the spending needs formula for these services.

In its consultation, the government says the fact that differences in population statistically explain the vast majority of variation in councils’ overall spending on these services justifies its new proposals. However, this is in fact a poor justification. Population varies so much between councils (e.g. less than 40,000 in Rutland and more than 1.5 million in Kent) that it is inevitable that population will explain the bulk of variation in councils’ overall spending, even if factors like deprivation are significant drivers of variation in spending needs per person.

 A response to the government’s consultation by IFS researchers shows:

  • Moving to a population-only formula for these services would likely hit councils in inner London, and most other major urban areas like Manchester, Birmingham, Newcastle, Bristol, Kingston-upon-Hull, where deprivation tends to be concentrated.
  • Compared to a formula accounting for deprivation, it would also likely hit some of the more deprived counties such as Cornwall, Lancashire and County Durham, albeit to a lesser extent.
  • Conversely, it would benefit most other shire counties, especially in the South East of England, as well as large parts of suburban outer London.

While many other proposals in the consultation are sensible, it is unclear why the government proposes to account for population growth when assessing spending needs, but not when assessing revenue-raising capacity.

This would mean fast-growing councils gain twice over – both by being allocated more money by the government and allowing to keep the extra tax revenues they raise. Implicitly this means councils with slower growth (or declines) in population losing out. This does not appear sensible unless the government wants to reward and incentivise population growth and housing development – on top of existing schemes (such as the New Homes Bonus) already in place. If this is the case, the government should be explicit about this.

David Phillips, Associate Director at the IFS, said: “Many of the government’s proposals on assessing councils’ needs and revenue-raising capacities are eminently sensible. However, the statistical analysis it cites to justify not including deprivation in the funding formula for many key services does not stand up to full scrutiny.

It is too early to say what the overall impact of the so-called Fair Funding Review will be on different councils – many elements like formulas for social care services (a big chunk of spending) are yet to be published. But if the government does go ahead with plans to base the needs formula for services like homelessness, public transport and libraries on population only, our analysis suggests deprived councils will lose out.”

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This note is a response to the consultation from the Ministry of Housing, Communities and Local Government concerning the needs and resources of local authorities.