Cllr Nick Rushton is the Leader of Leicestershire County Council.

Local government funding is comprehensively broken. Allocations today are still linked back to historic spending levels – rewarding those who spent the most on services decades ago. This means that taxpayer funding is increasingly badly matched to demand and need, exacerbating existing imbalances between different places.

The Government has rightly said it wants to review the entire system, but the pandemic has postponed the difficult decisions. This is understandable but with every year that passes the distortions in the system get worse. An interim solution is desperately needed. That is why I am calling for a funding floor to be introduced for local government funding, to reduce the risk of collapse for some authorities, and make revenues more stable and secure for everyone until the Fair Funding Review comes into effect.

What’s gone wrong?

There are a lot of components of the current system that are woefully out of date. The most significant example of this is Council Tax bands, which are still based on 1991 property values. But this is just one element based on historic data that distorts funding today. For example, the funding allocation model used today dates back to 2006/07 where changes brought in reduced transparency and the link between assessed need and funding.

Up until 2013, some of the key data elements were updated annually. However, from 2013 no further updates have been incorporated and much of the data feeding into the 2013 model was much older. For example:

  • Traffic flow data was based on flows observed in 2009 to 2011.
  • Child Tax Credit information was based on amounts received between 2008 and 2011.
  • Unemployment data is based on claimant numbers between 2009 and 2012.

And there is a further raft of variables still based on 2001 census data. These include a whole range of indicators which feed into measuring relative deprivation and other measures of need, including:

  • Population density and sparsity
  • Number of rooms per household resident
  • Net inflow/outflow of persons working but not resident

These methodological holes in the system contribute directly to a flawed set of allocations to local authorities every year. The vast majority of the data is at least 10 years old and much of it is much older still. A lot can happen in an area in the space of ten years: just look at Stratford in London or Salford in Manchester. We have proper funding formulas for schools and the police – why not for local government?

The system has never been popular. The House of Commons Committee of Public Accounts described the system as “highly complex and not sufficiently transparent, making it virtually impossible to follow the link between calculated service needs and funding allocations.”

There are three further reasons for reforming local government finance.

The first is that Council Tax is highly regionally regressive, benefiting more prosperous regions and adding disproportionate cost in poorer regions. For example, average Council Tax per head in London is the lowest in England (£481), despite house prices being much higher in the capital than elsewhere. Looking at household income, total Council Tax receipts equal just 1.2 per cent of gross disposable household income (GDHI) in Camden but 3.8 per cent of GDHI in Redcar and Cleveland and 4.6 per cent of GDHI in East Devon. This cannot be right.

Add to this the fact that Council Tax incentives are all wrong. It should be the case that levels of Council Tax reflect how financially efficient the authority is, and the Treasury should be able to reward places that grow their economies. But the valuations are so out of date and tax rates have diverged so much between different areas, that it is even harder to press places to make efficiency savings and encourage well-run councils to go further. The baseline is simply wrong.

Second, funding allocations have been traditionally calculated based on regression analysis against previous spending levels. This means that those authorities who have spent the most historically will be rewarded with higher levels of funding going forward. And the less aligned the funding is to need, the more likely it is that local authorities will go under, because they can’t budget effectively or meet the demand in their area. Until we fix this, the “haves” will continue to benefit and the “have-nots” will continue to fall behind.

The third problem is the proliferation of small targeted grants, which weakens resilience in the system. According to the Local Government Association, of the approximately 250 grants issued to councils each year between 2016 and 2019, over one-in-three were discontinued from one year to the next. Of the 218 grants allocated to councils in 2017/18, over 90 per cent were listed as ending in that same year. This is no way for councils to plan for the long-term.

And the increased use of competitive bidding to central government pots, like the Levelling Up and Towns Funds for example, mean that councils can often end up diverting resources to a short-term application process rather than which means that under-resourced authorities have even less capacity to secure funds.

These smaller, very specific grants also limit what councils can deliver, restricting opportunities to innovate and change the way they work. Rather than flexible funding or funds designed to be used preventatively, these smaller grants are reactive, responding to crises that have already emerged and become entrenched.

All of this undermines the ability of councils like mine to plan long-term. And it harms the quality of service provision and value for money for taxpayers, as councils are forced to devise strategies for closing down services or projects in case their funding is arbitrarily discontinued.

What should we do about it?

These problems are so deep-rooted that a comprehensive rethink is needed, which the Government has already committed to through the Fair Funding review of local government finances. Understandably, this review has slipped due to the disruption caused by coronavirus. But as we emerge from the worst of the pandemic, it is imperative that the Government grasp the nettle once again.

For now, the Government could introduce an interim measure to level up local authority funding to a more sustainable level. Doing so would not only better reflect the needs of different communities, in the process helping struggling areas to level up, but also ensure that better resourced local authorities continue to innovate to deliver better services and value for money.

The biggest challenge to long-term funding reform is that, whatever changes are implemented to the system, there will be some local authorities who will lose out. So our suggestion is simply to make additional funding available to those authorities who have the double whammy of higher levels of Council Tax and lower levels of core spending power – levelling up their core spending power without redirecting funding from other places. By introducing a funding floor for councils, as was recently used for school funding, the Government could quickly bring the least well-resourced local authorities up to a respectable level without the considerable political risk and fiscal cost of revising the entire funding system in one go.

If a fixed sum of additional funding was made available, this could be directed at pulling up those authorities with low core spending power per head closer to the national average. Setting this floor at 90 per cent of the average core spending power of local authorities, we have estimated the costs of this to be £300 million a year. Around 30 of the poorest local authorities, mainly based in the Midlands and the North of England, would benefit from the change.

Plugging the gaps in this way would be a relatively straightforward way to level up local governance by reducing the imbalances in the system and making councils’ finances more stable. It would also be a step in the right direction making councils less dependent on central government decisions. A guaranteed funding floor would mitigate a lot of the issues around reliance on smaller, short-term, competitive grants. Future revenue would be more predictable and create not only more certainty but more flexibility.

Although this proposal for a funding floor would create more resilience in local government finances, again, this stop-gap measure should not replace the wholesale reform of the comprehensive Fair Funding review in due course.