Inner London borough councils could be hit hardest by the outcome of the fair funding review, according to the Institute for Fiscal Studies.
It believes the government is set to make low-taxing councils “bear more of the cost” of services, at the same time as reducing spending needs estimates for councils which are currently deemed to have the highest needs.
London boroughs tend to set low council tax rates but they have historically received more generous income streams in relation to other councils, in part due to their high needs assessments.
In one of two notes published today the IFS said the government’s fair funding review should take into account how much councils would raise if they all set the same council tax rate.
The IFS said: “Councils setting higher or lower tax rates would therefore retain any extra revenues or bear any cost in full.”
However, it added the localisation of council tax benefit had made this “more difficult than in the past” and warned the method “could lead to councils being incentivised to offer bigger discounts to more households, hence undermining tax revenues”.
As a result the government should ensure that the fair funding review is transparent in the way it changes the way councils are funded in the future.
Neil Amin-Smith, research economist at the IFS, said: “Continuing to take account of councils’ actual council tax revenues when redistributing between councils isn’t a viable long-term option. Moving back to a system where redistribution takes account of how much councils would raise if they all set the same tax rate would be better but would create winners and losers.
“Councils with low tax rates, such as many in inner London, would lose as they would have to bear the costs themselves. The flipside is that councils with higher tax rates, including many county areas, would gain as they could keep the extra revenue to spend on better local services.”
Paul Carter (Con), chair of the County Councils Network, said the current system, which allows some inner London boroughs to charge residents half the amount of council tax than counties, “is perverse and unfair”.
“I hope the government is brave and backs the report’s conclusion to use notional rather than actual council tax rates in determining funding allocations,” he said. “While the consideration of council tax is important, it is only part of the fair funding review. We will work with all parts of the sector to ensure that the needs assessment is evidence-based, while putting in place the right incentives to deliver housing and economic growth.”
Cllr Carter added he was “encouraged by the direction” of the fair funding review to date but added “it must recognise the severe demand-led pressures” counties face.
A London Councils spokesman urged the government to use deprivation as a measure for determining councils’ future funding needs and to give it an “appropriate weighting” in the new formula .
He welcomed the IFS’s calls to make the review transparent.
“We agree that ministerial discretion over the extent of redistribution between councils should be exercised transparently and that the current system is extremely complex, confusing and unstable,” he said. “London Councils would urge ministerial judgements over the funding formula to be kept to a minimum, be informed by evidence and above all should be transparent to the sector.
“We also agree that the government must clearly show how different options will affect different councils – and must do so with detailed exemplifications well in advance of the implementation in April 2020.”
While the fair funding review is “about how to slice the funding pie, not the size of that pie”, the IFS said the spending review “will be more important for the overall financial health of councils – and the sustainability of the services they provide”.
Mike O’Donnell, associate director for local government at the Chartered Institute of Public Finance & Accountancy, said “the fair funding review should not be about creating winners and losers” but ensuring money is distributed fairly.
He warned equalisation, while “an important consideration… will generate trade-offs in terms of incentivising growth in a particular area”. He added: “And however the pot is divided up, it is important not to lose sight of the fact that there is just not enough money in the system for all the services local government is expected to deliver.”
A Ministry of Housing, Communities & Local Government spokesman said: “We are providing local authorities with £90.7bn over the next two years to meet the needs of their residents.
“We are also giving them the power to retain the growth in business rates income and are working with local government to develop a funding system for the future based on the needs of different areas.”