Local government finance

Much of the power to raise taxes and allocate public spending is held by central government. However, some powers are delegated to local authorities. The IFS has analysed tax and spending at these local levels, both to inform policy and address more fundamental questions about the effects of local tax and spending systems on outcomes of interest.

We are currently undertaking a multi-year research programme examining key issues related to ongoing reforms to England’s system of local government finance. This programme, funded by Capita, CIPFA, the ESRC and PwC, as well as the Municipal Journal, the Society of County Treasurers and a range of local authorities, is designed to inform policymakers and the public debate about the options for local tax and spending policy going forwards, and the trade-offs involved.

Our work is organised around several key policy issues, including the so-called Fair Funding Review, business rates retention and tax devolution, and the impact of funding cuts across councils. A summary of our key findings to date can be found here.

The Fair Funding Review

The aim of the Fair Funding Review is to design a new system for allocating funding between local authorities. This will involve updated and improved methods for estimating local authorities’ differing abilities to raise revenues and their differing spending needs. It will also have to consider the extent to which differences in these should be compensated for by the funding system.

Our first two reports on the Review look at some of the key issues that arise in assessing local authorities’ spending needs, and measuring their revenue-raising capacity. We argue that both involve inherently subjective judgements – not least because of the sensitivity of estimates to choices such as which year of spending data to base spending needs formulas on, and which local characteristics to include as needs indicators in those formulas. More recently, our response to the government’s consultation on the Review highlight that the overall approach they are taken is sensible, but questions the rationale for some specific proposals that could shift funding from more deprived to less deprived areas.

Articles in the Local Government Chronicle, Public Finance magazine and the Municipal Journal, highlight some of the key issues in needs assessment, questions over the treatment of revenues other than council tax, and the importance of ensuring the new system is transparent.

A chapter in a British Academy book also puts the Fair Funding Review in a broader context, asking the extent to which we want local responsibility or national standards for different local public services. A report for the Health Foundation considers these issues for adult social care specifically – arguing there are inconsistencies between policy objectives for this service area and ongoing reforms to local government funding.

Business rates retention and tax devolution

The business rates retention system means councils gain or lose as local business rates revenues rise or fall. The government plans to increase the proportion of gains or losses borne locally to 75% from 2020-21 (from the standard 50% currently), and has been piloting 100% schemes in local authorities covering half the English population this year.

Our reports consider key issues including:

• The potential for divergences to open up between revenues and spending needs under business rates retention is shown to be significant, particularly for smaller district councils in areas with two-tier local government. Associated risks could be minimised by shifting more of the gains/losses to upper-tier county councils.
• The impact of business rates appeals on revenues is shown to vary significantly across local authorities. As this relates to a risk outside of local authorities’ control, there is a strong case for centralising the responsibility for funding business rates appeals.
• The limited scope for learning from 100% business rates retention pilots, and the financial impact on pilot councils and central government.

We have previously analysed the financial impact of business rates retention across councils and will both update this assessment and examine the potential impacts of future reforms, building on our response to the government’s high-level proposals.

We have also assessed the options for further tax devolution to English local government, finding that if significant further devolution of tax revenues and powers was deemed desirable, a local income tax would be the best option.

Funding cuts

As the government has cut its grant funding for local authorities, this has had different effects across different local services and different areas of England. Cuts have been larger in councils that are more grant-dependent, which typically have higher levels of deprivation. Children’s social services and adult social services have been relatively protected from the spending cuts, but those cuts which have been made are typically larger in more deprived councils.

We have also examined the extent to which cuts to social care funding impact usage of NHS services by the over 65s. Our estimates suggest the cuts have increased accident and emergency attendance by the over 65s by around a quarter – although the cost of this to the NHS is modest compared to the reduction in spending on social care services.