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TUC & NEF report: Local government will face £25bn funding gap by 2025
The TUC and New Economics Foundation (NEF) yesterday (Sunday) published a report on the impacts of local government funding reforms.
- Most councils to be left worse off by funding reforms – NEF/TUC analysis
- No-deal Brexit could shrink council resources under new funding rules and increase spending demands
The reforms are cutting central government grants to councils to almost zero – with just a few ringfenced grants that will account for less than 9% of local authority expenditure. Councils will instead keep a higher proportion of the business rates they collect.
The report identifies major problems with the funding reforms, including greater exposure of council funding to the economic harm expected from a no-deal Brexit.
Local government funding reforms
In 2010, around half of local government funding came from central government. By 2024/25 this will have been cut to zero, with the exception of a very small amount of ring-fenced funding.
The central government grant is being partially replaced by allowing councils to retain business rate revenue. However, councils will be left with substantially less funding overall compared to the resources they had before the cuts began in 2010.
The reforms will favour councils where future business growth is strongest, as their business rate revenue will grow. But areas that experience economic decline will suffer significant losses.
While local government income between now and 2024/25 will remain essentially flat in real terms, the funding gap will continue to grow. This is because demand on local government services will increase due to population growth and people living further into old age.
As a result of this demand growth, most local authorities are likely to experience a widening funding gap. They will only avoid it if they experience particularly fast business rates growth, which will be a much greater challenge for the poorest areas.
Poorer areas are also at greater risk of larger shortfalls because the new funding system is less responsive than the previous central government grants to higher levels of demand that are typical in communities with greatest economic deprivation.
Councils will face these pressures in addition to the funding gaps left by a decade of austerity. The analysis by NEF estimates an overall funding gap of £25.4bn for local authorities relative to the level of services they were able to provide in 2010.
No-deal Brexit and the threat to council services
The analysis assumes that the UK avoids a no-deal departure from the EU and does not suffer the disruption to business and recession that the Bank of England has suggested would follow.
However, the TUC and NEF warn that a no-deal Brexit could lead to an even larger funding gap, and even greater pressure on vital neighbourhood services.
The disruption expected to businesses could reduce business rate revenue, leaving local authorities with less income, alongside higher demands to meet from the social and economic costs of recession.
And a no-deal Brexit could also mean that councils are faced with rising demand from an influx of UK nationals who currently reside in other EU countries but could be compelled to return to the UK by loss of citizens’ rights.
TUC General Secretary Frances O’Grady yesterday said:
“This government’s changes to how councils are funded leaves a colossal hole in local budgets. And it’s the poorest communities that will face the biggest shortfalls.
“We need a local government funding system that helps rebuild local services and closes the funding gap between poorer and richer areas.
“Any government that cared about local services would rule out a no-deal Brexit. These funding reforms leave councils far more vulnerable to the economic damage that would be caused by crashing out of the EU without a deal. And that will mean bigger funding gaps for services that families rely on like social care, youth services and children’s centres.”
- NEF and TUC report: The full report Councils in Crisis: local government austerity 2009/10- 2024/25 will be published on the NEF and TUC websites on Sunday 8 September 2019. And it can be viewed here under embargo to 00.01hrs Sunday 8 September 2019: https://www.tuc.org.uk/sites/default/files/2019-09/Local_Government_Austerity.pdf
- Summary of conclusions from the report:
- The funding scheme planned for local authorities is insufficient, and will result in major funding gaps and greater inequalities between communities.
- A new approach is needed that closes funding gaps, addresses inequalities in distribution, and is responsive to differing levels of need from demographic pressures.
- Any new approach should meet the principles of good tax design:
- Improve the long-term financial sustainability of local government
- Increase progressivity of locally administered taxation
- Increase accountability and transparency
- Improve on economic efficiency, for example in the housing market
- Be politically and technically feasible
- If local authority funding includes incentives to encourage councils to promote business growth, it must not result in punitive levels of funding for communities affected by economic deprivation. Current rules on business rate retention should be amended so that the portion of revenue growth councils can keep is proportionate to need.
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