Warwick Lightfoot is the Head of Economics at Policy Exchange
The ability of the coronavirus pandemic, and the attendant lockdown, to upend matters reaches to all aspects of state and society – and local authority finances are no exception. The provision of vital local services is now considerably stretched, as Robert Jenrick, the Housing, Communities and Local Government Secretary acknowledged last week, as he announced £1.6 billion of emergency funding.
In particular, there will be pressure on adult social care, registration services, mortuary and cemeteries, while staff absence is likely to be higher for weeks or possibly months. All of this takes place while many sources of revenue – albeit marginal – from things such as charging for parking or planning applications are under threat.
The good news is that it is not yet clear that the pandemic is an inevitable disaster for local authority finances. The bulk of local authority funding comes from three sources: Council Tax (retained by the council), business rates (which are generally pooled nationally, although subject to Byzantine arrangements where some authorities retain 50 per cent), and grants from central government. While the Business Rates holiday announced in mid-March has obvious implications, it is likely that Council Tax and the grants will continue more or less as before. Central government will also help local authorities via Housing Benefit, which props up Council Tax revenues, and it has made clear that it will meet the cost of the business rate relief measures.
The lockdown and remote working will, however, have a direct effect on local authority accounts. This is the time of year when council finance departments complete their annual accounting and close their account books. This process will be significantly disrupted this year, with the result that financial information about councils will be incomplete and delayed.
But overall, the key to grasping local authority finance is to appreciate that central government and Parliament have decided to give local councils responsibility for important and complex public services. These include child protection, disability services for adults, adult social care, and educational services. Councils, on the other hand, have a limited tax base, mostly centred around property. This property tax base does not offer an elastic or buoyant source of revenue. So to fund these expensive and complex services, central government has to supplement the councils’ property tax base with grants.
What is more, the economic capacity of local councils varies – and taxable activity across the country does not neatly correlate with social and community need. This has been a longstanding issue in English local authority finance and pre-dated even the Layfield Report on local government finance undertaken almost 50 years ago. If anything, economic change and de-industrialisation since the 1970s has compounded it further. Yet a generous and sophisticated grant regime that directed resources to councils on the basis of need ensured effective national revenue sharing, which allowed public services provision to be roughly uniform around the country.
Apart from the big three sources of local authority revenue – Council Tax (32 per cent according to the most recent figures), Business Rates (17 per cent), and grants from central government (49 per cent) – a further couple of per cent of funding can come in from an eclectic group of other sources. Parking charges, sales of assets (such as redundant property), and investment income can all make a modest contribution to council budgets. These cannot be relied upon to fund services properly. And like Business Rates, the amount of revenue that can be accrued from parking charges, for example, is a geographic lottery. It usually turns on whether a council has a major shopping centre, the classic examples being central London boroughs such as Camden, Kensington and Chelsea, and Westminster.
The virus certainly brings into sharp focus some important principles of keeping council budgets in order. First, many local authorities are inescapably reliant on help from central government revenue and redistribution of tax revenue on the basis of need. Second, ingenious forms of local taxation, charging, or money-raising, such as revenue from criminal justice enforcement, are not a magic bullet solution. Third, the national government must be willing to step in to ensure that in a crisis, needs are met and the public services that it has legislated for are provided.
There has been a push in recent years to find new ways for local authorities to raise revenue, especially since grants from the centre were cut in the years after 2008 crash. Most notable has been an experiment in recent years to encourage local authorities to retain more of their local business rates and to move away from a grant regime based around the core principles of revenue sharing and need.
This has been enacted in Government policy: the Business Rates Retention Scheme, introduced in 2013, allows local authorities to retain 50 per cent of the business rates in their area. Subsequently in 2019, the Government piloted schemes to allow some local authorities to retain up to 75 per cent. Arguments behind these policies are often animated by a belief that retention will incentivise Local Authorities to support local growth, and a resentment of the UK’s economic centralisation in Whitehall.
The problem remains that many local authorities – retirement communities, and “left-behind places” with older populations, for example – do not have an economic base to stimulate. The brute facts of economic geography very often mean that the only way to ensure that local councils can meet their need is through a generous system of grants that redistribute revenues around the country.
In a crisis like the one the country is experiencing, there is no alternative to relying on the immense borrowing and tax-raising power of the national government. To ensure that local authorities are able to meet all of their service requirements while maintaining balanced budgets, the government grant will have to take the strain. The Government has rightly displayed imagination and generosity in helping households and businesses and will have to continue doing the same for councils. There may well be opportunities further down to the line to for ministers to explore opportunities to give councils more buoyant sources of tax, such as revenue from local income, and sales taxes to finance local public services. But that time is not now.