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Nick Rushton: we face a £30bn gap – even if council tax rises

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As we close out almost a decade of austerity, there have been few crumbs for comfort for local government. Paradoxically, austerity has shown the best of local government.

Faced with unprecedented financial pressures, councils have shown how to do austerity well; transforming services and doing more for less. But a story of nine years of successive funding reductions rarely has a happy ending – the truth is that the elastic can barely be stretched much further.

For the first time since 2010, we have had ministers in recent times willing to make the case for local government. But uncertainty on Brexit, and coming changes in the occupant of No 10, mean that today’s report by PricewaterhouseCoopers (PwC) for the County Councils Network (CCN) is released at a critical juncture.

Many cash-starved departments have been making the case for an uplift in funding at this year’s planned spending review and we know from analysis by the Institute for Fiscal Studies that, if it goes ahead, there will be little to go around.

Any new prime minister, or the Treasury, will not sign off on any uplift in funding – whether short or long-term – without compelling evidence. It is therefore important that the sector puts a persuasive case forward.

There has been plenty of analysis on the sustainability of funding in local government in recent times, but much of this has been narrowly focused on who has suffered the most from reductions in funding, when instead we should be looking at what resources councils really need to provide services.

PwC’s analysis for CCN, one of the most detailed to-date, does precisely this; projecting spending need and the ‘funding gap’ facing local services up to 2025.

The headline results are stark. If no extra funding is made available, then councils in England will face a £51.8bn cumulative funding gap that must be filled by 2025. This falls to £30.2bn if councils put their council tax up by a further 15% over the next five years.

It raises the question about what people should reasonably expect councils to deliver, with demand only projected to rise. Well-run authorities will be setting out a basic, core offer, to residents, with the prospect that some under the most financial strain being unable to deliver a balanced budget unless the Treasury provides more funding

The report by PwC, however, doesn’t just provide compelling evidence on the quantum of resources needed at the spending review.

The analysis provides evidence to show beyond doubt that the current system for funding local authorities is broken.

Many other studies have failed to recognise that actual expenditure may not necessarily correlate with actual spending need, with higher expenditure partly a product of historic funding levels. Conversely, lower expenditure could be due to lower levels of funding and may fail to recognise ‘unmet needs’.

PwC’s analysis is therefore based on the funding required for councils to provide a ‘more consistent level of service’.

This does not mean that every council should be delivering the same services, or that every council should only aim to provide a standard of level of service. But it does allow a fairer approach to estimating spending need to ascertain the relative funding challenges facing different types of councils.

This methodology recognises that county, metropolitan and London boroughs face different levels of demand for services. It uses 17 different cost drivers across 10 service areas and adjusts for the labour and property costs that are the product of a council type’s geography, as well as unavoidable costs such as inflation and the living wage faced by all councils.

PwC shows that whilst every type of local authority faces significant increases in spending need, counties and metropolitan boroughs are most in need.

In total, counties’ funding black hole of £21.1bn represents 41% of the total funding gap; metropolitan boroughs follow with £13.3bn which is 25%. Conversely, councils in London account for 7% of the funding gap; £3.4bn.

The results also demonstrate that over past four years, if London had been providing a level of service more comparable to other councils, it would have had a funding surplus. Conversely, CCN councils have around £1bn of ‘unmet need’ in their historic expenditure.

This yet further evidence of the need to undertake the fair funding review, recognising the status quo on how differing councils are funded cannot go on.

Alongside additional and fairer funding, what can councils to do fill this funding gap? Council tax is the obvious answer.

But PwC estimates show that while this can make a significant contribution by 2025, council tax will account for an unfair and disproportionate 70% of county authorities’ funding, and still leave a cumulative funding gap of £11.6bn over the period.

Separately, the report shows that county areas have the least ability to raise service fees and charges to help cover increased costs and demand. While county councils can meet just 3.4% of their funding gap in 2020-21 if they increased charges by 10%, this would eradicate almost a quarter of the funding gap faced by district councils.

And the report also puts to bed Eric Pickles’ myth that all we need to do is raid our reserves to stay afloat. For counties, just 7% of our future funding gap could be met by using reserves. What would happen if we did do this? We would be insolvent.

The publication of this study today is an important moment for the sector in our battle for sustainable and fairer funding whoever occupies Whitehall’s corridors of power in the coming weeks.

Nick Rushton (Con), finance spokesman, County Councils Network; leader, Leicestershire CC

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