Five biggest issues: David Phillips on local/central funding tensions

In a new article in the Local Government Chronicle, IFS Associate Director looks at the tension between localised funding and centralised standard-setting in social care. The article is available here and reproduced below.

The pressures on councils’ adult social care services are well known. Falling care budgets – down by around 8% in real terms between 2009–10 and 2016–17 – have meant big reductions in the number of people receiving care and pressure on care providers to reduce costs. Campaigners argue that growing numbers of people do not receive the care they need while many care providers warn that with their costs rising – not least due to the higher National Living Wage –, their financial position is becoming unsustainable. In response recent Budgets have seen more money found for social care in the form of higher council tax rises and new ring-fenced grants, much of which has now been front-loaded to the current financial year. Projections by IFS researchers suggest that if this money is spent in full on social care, by the end of this decade it would be more than enough to undo recent budget cuts. Labour and the Liberal Democrats have also promised further additional money for social care – around £2 billion a year (a 10% increase) by 2021–22 in the case of Labour – if they get into office after the general election. 

So does this mean policymakers are finally sorting out the problem of funding social care? Can councils breathe a sigh of relief?

I’m not sure they should. Not only because a growing and ageing population, wage increases and issues with staff recruitment and retention means that rising demand and costs could quickly gobble up any additional funding: Labour’s proposals for a £10 minimum wage would soak up around 40% of the extra social care funding they promise, for instance. But also because there is an unresolved tension between an increased emphasis on national standards and eligibility criteria for social care, and moves towards more localised funding of council services.

Under current plans, councils would retain 100% of business rates revenues by 2020. At the same time general grant funding from central government would be abolished. The aim is to provide stronger financial incentives to councils to boost local growth and local tax revenues, and take action to reduce underlying spending pressures. But it would also reduce the extent to which funding is redistributed between councils as local revenues and spending needs diverge, increasing the risk of big gaps between spending power and demand for services opening up in some localities. At the same time, councils’ flexibility to adjust to such risks may be reduced given the planned introduction of a national cap on the care costs individuals themselves can be asked to pay over their lifetime.

2020 also sees another change to business rates: annual increases in average bills will no longer be capped at the old RPI measure of household inflation but at the lower CPI measure. There is some justification for this change: RPI has flaws which mean it is likely to overstate inflation. But after 10 years, this seemingly ‘technical’ change may result in councils’ budgets being around £3 billion lower than they would otherwise have been. And an ageing population is likely to mean the cost of meeting social care demands rises by more than household inflation, especially given the labour-intensive nature of many care services. Of course, councils may well have more flexibility over the levels of council tax and care fees they charge, but it is far from clear that funding needs could be met by these sources of revenue alone, especially given referendum requirements for council tax.

So I would not be surprised if central government retains or reintroduces grant-funding, perhaps ring-fenced for social care. However ring-fencing does not actually guarantee that all such funding actually gets spent on social care services. To satisfy current ring-fences, for instance, councils are required to state that they have used the funds to spend more on social care than they otherwise would have. Because the government can never observe what they would have spent in the absence of the additional funding, they have to take councils’ word for it. In practice then, with pressures on other service areas too, councils may understandably be tempted to channel supposedly ring-fenced funding elsewhere. It may therefore be simpler and more transparent to do away with the complex ring-fences altogether.

Alternatively, if central government wanted to make sure any additional funding got spent on social care, it would have to start setting adult social care budgets centrally. Funding for social care could be hived off from funding for other council services, in much the same way as the Dedicated Schools Grant has for schools budgets In England for the last decade or so. Doing this though would represent a significant power-grab away from councils and go against the grain of greater devolution. If the funding for such a Dedicated Social Care Grant were found by tapping into councils’ business rates and council tax revenues, it could also increase the funding risks for the councils’ remaining services – such as children’s social services, public health, waste management, libraries and local transport.

So while the amount of funding available for social care is clearly important, the way social care is funded, and how that fits into the wider local government finance system requires serious consideration too. The tension between a desire for common (and high) national standards of care on the one hand – what Labour’s manifesto terms a ‘National Care Service –, and local discretion, accountability and financial incentives on the other is a big one. With important decisions on the social care system and local government finance coming up over the next year, both central government and local councils need to begin thinking seriously about how plans in these areas fit together.