Local Government Finance - Fair Funding Review

Dear Secretary of State

Local Government Finance - Fair Funding Review

I am writing to you as the Chair of the Key Cities Group. This group represents 21 medium size cities in England and Wales, with political leaderships from both main parties. Our ambition is to work with government and other regional and local partners to deliver an economy that benefits all our people and places, and contributes to a strong and successful Britain.

Empowering and investing in Britain’s medium size cities will support the ambitions within the Industrial strategy to build on our strengths and extend excellence into the future, close the gap between our best performing companies, industries, places and people and those which are less productive, and to make the UK one of the most competitive places in the world to start or to grow a business.

Linked to this is the Government’s objective of having an economy that works for all. Addressing poverty and inequality is one of the fundamental ways of creating more prosperous cities. Key Cities are committed to ensuring that growth is inclusive and not just trickle down, and we believe that whilst labour market participation rates are important, it is the quality of employment and opportunity that will effectively help to respond to social and other issues in our communities.

It is universally recognised that the current incentive based system for local government finance is inherently unfair and has eroded the previous links between the relative needs of local authorities and relative funding. I therefore wanted to take this opportunity, on behalf of the Key Cities Group, to write to you to express our views around an equitable and sustainable system of funding for local government.

A priority of any funding system for local government must be to assess the needs of local authorities – a major flaw in the current funding system is that it makes no provision for changing needs of local authorities over time. Need and resources were last fixed when the current 50% business rates scheme was introduced in the 2013/14 financial year, with a ‘promise’ of a reset at an undetermined point in the future. The local government landscape is very different now to what it was in 2010 with significant changes since 2013/14.

There is clear evidence that the gap between affluent and poorer authorities is widening with authorities with relatively high needs and low resources being left behind. A prime example is Blackpool, the most deprived area in England which has seen reductions in its core funding from Revenue Support Grant, Business Rates and Council Tax of 12.4% between 2010/11 and 2016/17, equivalent to £126 per head of population – by contrast, Wokingham, an area with significantly less deprivation, has over the same period seen its core funding increase by 8.9% or £56
per head of population.

Equalisation and redistribution should be cornerstones of any local government funding system and we recognise that to balance these against incentives and rewards will be a difficult challenge. However, any future system/approach to needs and redistribution must first and foremost support local authorities to tackle inequalities and deprivation - equity and fairness being the overriding principles for the development of any new funding formulae.

In terms of the formulae that will underpin any funding system, our view is that simplicity itself should not be a major driver – it is more important that any new approach is fair. The formulae used up until 2013/14 were developed over a number of years and were necessarily complex, a complexity that reflected local services and needs and which was,  in the main, accepted by local authorities as a system that distributed resources fairly. Even with a complex system, there were anomalies and outliers and if there had been a simple way of allocating resources fairly, it would have already have been found and implemented. For example, a simple distribution based on population/geography alone would result in huge changes, with funding flowing from areas with high needs to those where needs are much lower – this would be clearly unfair and unpalatable. Our preferred approach would be to start simply and be prepared to add complexity to make the formulae as fair as possible, but only as far as is necessary. We would also stress that any new formulae will also need to be transparent and explicable, and not overlaid with unnecessary complexity that serves only to confuse – all local authorities should be able to understand their own position and how this relates to other councils.

The funding cuts to local government since 2010 have, by necessity, led to an increasing focus on statutory services and those which support the most vulnerable in society, in particular on children’s services and adult social care. As these two services make up a significant proportion of the expenditure of many upper-tier and single tier authorities, we believe that it is only right that the most effort is directed toward making sure that the formulae for these services correctly reflect the needs at a local authority level. Properly resourcing local authorities to manage the demand pressures in these critical areas will clearly benefit the wider public sector. In these times of austerity and reducing resources, we also feel that the principle of equalisation is more important than ever, it is vital that the new formulae will enable all authorities to provide a reasonable minimum level of service to meet the often rapidly changing local demand pressures they face.

Resources – any future system must take into account a local authority’s ability to raise income. Key Cities support moves towards greater local retention of funding, alongside wider fiscal devolution, but we must also ensure the system provides sustainable long-term funding and a platform to truly incentivise growth and selfsufficiency. Any assessment of funding at a local authority level should take into account all income streams rather than an arbitrary selection. Our view therefore is that the assessment of available funding should include core funding such as local business rates, council tax and grants, but also fees and charges and other commercial income.

In conclusion, any new finance system should support local authorities in their core purposes – to tackle poverty, reduce inequalities and to support good economic growth. A finance system should therefore incentivise local authorities to grow their local economies, invest in infrastructure and provide better services to the communities that they serve. We do question whether business rates retention, whether 50% or 100% provides the right incentive given the limited evidence of a direct correlation between economic growth and business rates. As local authorities, we are seeking to grow our local economies to meet our core values; to enable our communities to have a better quality of life, to enhance employment prospects and to be able to provide the leisure and cultural opportunities that accompany good economic growth.

I would welcome an opportunity to meet to express our views in person and look forward to working with your Department and local authorities to develop and implement a fair funding system for local government that is equitable, transparent and will enable local authorities to drive economic growth and tackle poverty and inequality in our communities.

Councillor Peter Box CBE
Chair, Key Cities Group