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Only fiscal and funding freedoms can address inequality

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A guest LGC briefing by Andrew Carter on the local government finance settlement

Last night MPs endorsed the government’s long awaited local government finance settlement. James Brokenshire hailed it as paving the way for a “fairer, more self-sufficient and resilient future” for local councils.

While the £1.3bn increase in spending power for councils is a step forward, it masks a further £1bn cut to central government grant. As Cities Outlook 2019 has recently highlighted, the poorer northern cities most reliant on central government funding will be most affected by this further cut to grant. Meanwhile places with stronger economies and higher house prices will fall back on funding from business rates and council tax – as they have during the last decade of local government austerity.

We must find a way to end this funding inequality. Fortunately, policy makers looking for a way to address it will be pleased to know some of the solutions do not demand significant amounts of extra funding. They do however require the political will to give councils the fiscal tools and funding freedoms to manage their finances that best meet the needs of their places.

First, policy makers should give councils more discretion over how they raise and spend money. The current rules stipulating that transport charges can only be spent on transport improvements, or planning charges on planning, are a straitjacket for councils struggling to keep libraries and children’s centres open. If the Government relaxed these spending rules it would let city leaders spend public money raised locally according to local need, and the cost to HM Treasury would be negligible.

Second, the government should enable councils to set multi-year budgets – where spend and income can vary year on year within the budget period. The current rules force them to set annual balanced budgets which means delivering long-term strategic service reforms and investments in areas such as health and social care, housing and transport very difficult. Again, allowing councils to set their own budget timeframes (within reason) would give them more room for strategic manoeuvre and would cost central government next to nothing.

Third, we come to a more controversial issue: taxation. The local government finance settlement has promised to maintain the 3% threshold required to trigger a referendum on council tax rises. I expect that, as demand for public services continues to rise, James Brokenshire will need to review this in the near future if he is serious about paving the way for a fairer, more self-sufficient and resilient long-term future for local councils.

Another aspect of taxation to be looked at in more detail is local levies, such as tourist taxes. Many cities globally implement tourist taxes and the latest Scottish Budget makes provision for them in cities such as Edinburgh. They tend to have public backing and would support the finances of cities with large numbers of visitors such as London or Brighton. The government should consider proposals to allow their introduction.

The final challenge for cities’ finances will be the hardest to solve: developing a sustainable social care funding strategy. Cities Outlook 2019 found that the growing demand for social care is adding to the squeeze on cities’ finances. A decade ago, just four cities out of the 62 we studied spent the majority of their budget on social care, now half of them do. It is no coincidence that Barnsley now ranks as both the British city that has seen the largest fall in spending since 2009/10, and also the place that dedicates the largest share of its budget to social care. While the extra funding coming through will help, we urgently need a long-term sustainable solution. Without one, many local authorities will soon find themselves able to do little more than provide social care.

Over the last decade local government shouldered more spending reductions than any other department. However, the prime minister has promised that austerity is nearing its end. This promise needs to apply as much to councils as to Whitehall. Councils, particularly urban councils, are at the frontline of delivering many of our most important public services and their economic success drives our national economy forward. The indications from the local government finance settlement are not encouraging in this respect; so all eyes now turn to the government’s upcoming spending review in the hope that their plans will provide a sustainable long-term financial future for local government.

Andrew Carter is chief executive of Centre for Cities.

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