Observations

Council-level figures on spending cuts and business rates income

Date: 28 November 2016
Authors:
Publisher: The IFS

Council-level figures on spending cuts and business rates income

Last month, researchers at the Institute for Fiscal Studies launched the first paper from a new programme on local government finance. This paper looked at a range of issues including, changes in councils’ spending and revenues over the last seven years, and issues related to the evolving English business rates retention scheme (BRRS). Today, we publish two spreadsheets with information for individual council areas:  a spreadsheet showing changes to councils’ spending on services between 2009–10 and 2016–17; and a spreadsheet showing relative gains and losses from the BRRS since it was introduced in 2013–14.

Changes in councils’ service spending

The first spreadsheet looks at how spending on services by local government has changed in different areas of the country over the period 2009-10 to 2016-17. This is complicated for two reasons. Firstly, in England one area can have services provided by multiple authorities (e.g. by a district and a county council). Secondly, the responsibilities of local government have changed over this period as services have been devolved.

We correct for the former by treating all areas of England as though they are a unitary authority – adding the spending of county councils to that of their constituent district authorities, and splitting the spending of combined authorities between their members. We correct for changes over time by excluding spending on areas of new or changing responsibility, in particular education, public health and some aspects of social care.

On this basis, we find that real-terms cuts to local authority service spending in England have varied from 4% in East Riding of Yorkshire and 5% in Hampshire* to over 40% in several authorities including Westminster (46%) and Salford (45%). Almost 1 in 3 councils** have faced cuts of 30% or more. As a result of the way grants have been cut local authorities that received the largest share of their funding from government grants in 2009–10 experienced the largest cuts to their service spending. The 10% of authorities most dependent on grants in 2009-10 received an average cut of 33%, compared to 12%*** for the 10% of authorities least dependent on grants.

Cuts to local government grants in Scotland and Wales were smaller over this period than in England, and as a result service spending has fallen by less on average.  In Wales the size of cuts also varied less across local authorities, ranging from 6.5% in Wrexham to 22.6% in Denbighshire. However in Scotland, the variation across authorities was almost twice that of Wales, ranging from a small increase in East Renfrewshire (1.6%) to a cut of 29.0% in Glasgow City.

Relative gains and losses from the Business Rates Retention Scheme

The second spreadsheet looks at relative gains and losses from the BRRS between 2013–14 and 2016–17, updating earlier analysis presented in our first paper.

To do this, we first calculate each council’s income from the rates retention scheme using outturns data (NNDR3 returns) for 2013–14 to 2015–16, and estimates as of January 30th 2016 for 2016–17 (from NNDR1 returns). As figures are not readily available on how income has been distributed within “business rates pools” made up of multiple councils, we have used a stylised pooling scheme based on the features of a number of pooling agreements (see methodological notes below for full details). Any safety net payments (to prevent very large losses) or levies (on revenue growth for councils with high business rates revenues) are also taken into account.

We compare this income to what a council would have received if its baseline funding level – the amount of revenue from the scheme each authority was judged to need at the start of the scheme in 2013 – had instead been increased in line with growth in national business rates revenues. Gains or losses relative to this baseline are presented in cash-terms, and as a percentage of councils overall funding (excluding grants specifically for education, housing benefit, or public health).

It is important to note that the figures presented are gains/losses relative to this counterfactual sharing of business rates revenues: we do not know how much councils would have received in the form of grants from central government in the absence of the scheme.

Results shows a wide range of gains and losses from the scheme. 24 councils see income gains between 2013–14 and 2016–17 equivalent to more than 5% of their overall funding, with Suffolk Council’s 24% gain equivalent to £16.5 million over four years. At the other end of the spectrum, 127 councils have experienced lower income than they would have received if revenues were pooled nationally. Westminster is recorded as suffering the greatest fall in both cash and percentage terms – 2.8% or £31.2 million over the same four years. This large loss reflects the fact that Westminster has been making large provisions in case of successful appeals against rateable values. If the appeals are ultimately unsuccessful, some of these losses will not actually materialise and their position will ultimately look less bad.    

Gains and losses reflect not only relative business rates performance in different parts of the country but the design of the scheme. District councils, for instance, retain 40% of the growth of business rates income in their areas. We estimate that as a result, as a group they will have gained almost £300 million over the last four years, equivalent to 2.4% of their overall budgets. The counties that cover the same areas receive only 9% or 10% of the growth in business rates and rely instead on top-ups to their rates income that increase online in line with inflation. As a result they have gained just £10 million (or 0.02% of their much larger overall budgets) during the same period (and would actually have lost were it not for the fact that they  have gained as a result of pooling with district councils). Fire authorities, London boroughs and metropolitan boroughs have all lost a little relative to what they would have received if rates income had been pooled nationally.

The second worksheet in this spreadsheet shows what would have happened if there were no safety net payments or levies on growth. Unsurprisingly gains, and especially losses, would have been larger. Westminster, for instance, would have lost the equivalent of 20% of its budget – £224 million over four years – as a result of its large provisions for appeals, and the fact it would not have received the £193 million of safety net payments that in reality it is set to.

Looking ahead, IFS researchers will build on this analysis, to consider how different councils may fare under different scenarios for revenue growth and different policy options for the 100% business rates retention scheme now under development.

This observation is part of a new programme of work on local government finance and devolution funded by a consortium of funders including Capita, CIPFA, the ESRC, PwC, the Municipal Journal and a range of councils across England.

Methodological note on Pools

This note explains how we treat Business Rates Pools in our figures.

First, all councils within the pool receive what they would have received from the BRRS if outside the pool. Second, if there is a surplus after this has been done, 50% of this surplus is shared proportionate to each council’s baseline funding level and 50% is shared proportionate to each council’s growth in business rates income above its baseline funding level for that year (among those that have experienced positive growth). If there is instead a deficit, the burden of this is shared in entirety in proportion to baseline funding level.

In two-tier areas, typically upper tier authorities (counties) receive most of the gains allocated according to baseline funding, and lower tier authorities (districts) receive most of the gains allocated according to business rates revenue growth.

---

Note

Please note, figures for a minority of councils have been corrected. In most of these cases the cuts are now estimated to be larger, but the changes are small in magnitude relative to the overall variation in cuts and does not affect the overall picture. Specific changes to the text include the following.

*This used to state that the largest cuts had been 0.6% in Surrey and 1.3% in Hampshire

**This used to say '1 in 3' councils.

***This used to say that the least grant dependent decile had face a cut of 9% on average.