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Home Publications The outlook for councils’ funding: is austerity over?

The outlook for councils’ funding: is austerity over?

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The government has forecast that what it terms councils’ core spending power could increase by 4.3% in real terms in 2020–21 compared with this year. In part this reflects a £1.1 billion increase in grant funding mostly labelled as being for social care services, but which can in fact be spent as councils wish. It also accounts for increases in business rates revenues in line with inflation, and assumes all councils increase council tax by the maximum allowed without a referendum (2% plus a further 2% for adult social care services).

  • Together with more modest increases in spending over the last two years, if this additional funding is spent in full, around one-fifth of the overall fall in spending per person between 2009–10 and 2017–18 could be undone by the end of next year. But this would still leave spending per person 20% lower in 2020–21 than it was in 2009–10.

  • Not all councils will benefit equally from the increases in government funding and council tax. The increases have been targeted at councils with social care responsibilities given these are where spending pressures are most acute – lower-tier district councils will therefore see significantly smaller increases in their funding.

  • Some councils may actually see a fall in funding next year, because the government plans not to renew pilots of ‘75% business rates retention’, with pilot councils moving back to the standard 50% retention. For example, we estimate that councils in Berkshire will gain the equivalent of 5.8% of their non-schools revenues from being a pilot area this year: the loss of this money next year is likely to outweigh increases in council tax and grant funding. But ending the pilots has freed up funding that can benefit councils across the country, not just pilot councils.

Looking further ahead, the vast majority of councils’ funding is set to come from council tax and business rates from 2021–22 onwards. This is because councils are set to move from retaining 50% to retaining 75% of business rates revenues, with grant funding cut accordingly to ensure the reform is revenue-neutral at the point of implementation.

  • Revenues from these two taxes will not keep pace with rising demands and costs – unless we see continued large increases in council tax each year and sustained improvements in productivity for key services such as adult social care. For example, with increases in council tax of 4% a year (double the rate of inflation) and no growth in productivity in the adult social care sector (in line with historical trends), the fraction of these taxes needed for adult social care could grow from 38% to 41.5% by 2024–25 and nearly 50% by the mid 2030s. Capping increases in council tax at 2% a year (the rate of inflation) would see adult social care needing 44% of local tax revenues by 2024–25 and 60% by the mid 2030s. In this case, the amount left over for other services would fall significantly over time, implying ongoing austerity for services that have often seen cuts of 40% already over the last decade, unless additional funding is found for councils.
  • Even with council tax bills increasing at 4% a year, we estimate an additional £1.6 billion of funding in today’s prices would be needed by 2024–25 to both meet projected adult social care costs and stop the revenue available for other services falling further as a share of national income. The amount needed would rise considerably over time, reaching £8.7 billion (in today’s prices) by the mid 2030s.

  • With 2% council tax increases, an additional £3.9 billion in funding (in today’s prices) would be needed by 2024–25, rising to £18.0 billion (in today’s prices) by the mid 2030s.

  • These figures are based on keeping the current social care system. Increases in generosity would push up costs further, necessitating bigger increases in funding or a bigger squeeze on other services. For example, estimates from the Health Foundation and King’s Fund suggest free personal care for the elderly – a recent Labour pledge – would cost £6 billion initially, but rise to over £8 billion in today’s prices by 2030.

  • As well as taking decisions about the overall level of funding to provide to councils, the next government will have to take decisions about how that funding should be distributed between them. Costs are likely to rise at different rates for different councils – because of differences in demographic and socio-economic trends. And the amount councils can raise from council tax and retained business rates varies significantly.

  • Councils could be given additional tax-raising powers, such as via a local income tax, or they could be provided with additional grant funding from Westminster. The former would give councils and their residents more discretion over how much to tax and spend, and stronger financial incentives to grow the local economy. But the latter would more easily allow money to be targeted at places where spending needs are the highest and/or local revenue-raising capacity is the lowest.

  • As it stands, there is a risk of policies for local government funding and social care coming into conflict. That is because the recent direction of travel in the funding system has been to increasingly prioritise financial incentives, which means undertaking less redistribution as local needs and revenue- raising capacities change. But at the same time both the Conservatives and Labour have highlighted an aim of ensuring more consistent social care service provision across the country. The next government will have to square this difficult circle.

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Press release
A growing elderly population, increases in the number of disabled adults, and increases in wage and other costs, mean that English councils will likely need billions in extra funding over the next parliament if they are to meet the rising costs of providing adult social care.
Press release
A growing elderly population, increases in the number of disabled adults, and increases in wage and other costs, mean that English councils will likely need billions in extra funding over the next parliament if they are to meet the rising costs of providing adult social care. That will be required ...