The course of local government finance never did run smooth…

The IFS started a major new programme of work on local government finance last year (a mere two decades after our last such programme!), partly in response to the ongoing changes to how local government is funded. In particular, we wanted to examine the big cuts to funding and the move towards a system with a greater emphasis on fiscal incentives – one that is making local authorities more reliant on their own local revenues.

However, there are some very real challenges in analysing both of these. The difficulty of constructing a reliable measure of 'service quality' means that whilst we have quantified the cuts to funding, we haven’t been able to look in much detail at their impact. With regards to fiscal incentives, it is tricky to robustly estimate what councils’ actual behavioural response to these incentives has been (or might be in the future).

It is these kinds of problems that we hoped to learn a little more about in our new report, written in collaboration with the LGiU and PwC. We use their surveys of council leaders and senior officers to look at correlations between the opinions and assessments of those officials and the characteristics of their local councils.

On the subject of service quality in the face of cuts to funding, respondents were fairly bullish – only 11% reported deterioration in the quality of frontline services in 2016-17. There may well be good reason not to take this figure at face value – respondents may have answered with a strategic goal in mind and their views may not reflect those of other council staff or local residents and businesses (these caveats apply to all the survey evidence I discuss here) – but the result is nevertheless remarkable.

However, when looking further forward this confidence begun to disappear. Perhaps tellingly, we found that respondents from councils that had experienced larger cuts and those from councils forecast to experience larger cuts in the future were less confident of maintaining service quality – suggesting a direct link between cuts to funding and drops in service quality. Furthermore, respondents from authorities with social care responsibilities were significantly more pessimistic about the impact of cuts on their services, with the majority saying that cuts to frontline services would become evident to the public in 2017-18. Of course, after these surveys were carried out in January 2017, £2bn of new funding for social care was announced in the March budget so this picture may well have changed.

The surveys also indirectly shed some light on the other issue I mentioned – the behavioural response of councils to fiscal incentives. We were struck by the fact that two-thirds of respondents felt unable to tell whether their authority had gained or lost funding as a result of 50% business rates retention. This uncertainty may to some extent relate to the fact that it is unclear exactly how funding would have been allocated to councils if the rates retention system had not been brought in. However, in my own work I have encountered first-hand the difficulties of using business rates revenue data to produce consistent and comparable measures of council incomes, so I’m inclined to think that at least part of the explanation for their uncertainty lies in the difficulty for councils of assessing their relative performance.

Such a difficulty could well muddy the operation of any incentive – it’s difficult to consciously try to grow your revenues if you can’t tell what’s working and what isn’t. On top of that, the uncertainty means that stakeholders in the media and public are also unlikely to have a clear sense of how their council has fared. This could weaken the incentive for councils to actively promote economic growth since they are less likely to be held to account for any potential underperformance. In the report, we suggest one possible solution to this – better and more widely disseminated information on councils’ rates revenue performance.

In better news for the effectiveness of the fiscal incentives, we also found that respondents from councils with higher GVA growth were more likely to be optimistic about 100% retention – suggesting they believe that if they can bring about faster local economic growth, growth in retained revenues will follow. However, research we will be publishing later this month suggests the link between economic growth and business rates revenue may not be so straightforward. The course of local government finance never did run smooth…