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Analysis: Sector and ministers have little room for manoeuvre on funding

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The unexpected Conservative parliamentary majority means any let-up in cuts to local government funding is unlikely.

In his pre-election Budget George Osborne set out a fiscal programme which suggested severe cuts in the first few years of the parliament, followed by increased public spending from 2019-20 onwards (although there was no guarantee that councils would benefit from this).

Having since also committed a Conservative government to not raising income tax or VAT and increasing both the inheritance tax threshold and point at which workers start paying the top rate of income tax, the chancellor has little room for manoeuvre.

As an unprotected department, the Department for Communities & Local Government is likely to bear the brunt again, without, according to the National Audit Office, it having demonstrated any real understanding of the impact of the cuts it has passed on to councils. So far so familiar.

Any thin hopes hinge on the new communities secretary Greg Clark winning a more sympathetic settlement from the Treasury following the comprehensive spending review, which is expected to report in the autumn. This would appear to be unlikely.

While he may not be able to change the overall envelope, it is within Mr Clark’s power to distribute funding differently. For example, there could be a rebalancing so that those authorities that are most grant dependent do not face the biggest reductions in their spending power.

However, it is counterintuitive to expect that a majority Conservative government would disadvantage the party’s heartlands in the south in favour of the largely Labour northern metropolitan councils which tend to be more grant dependent. Instead, the expectation is that there will be more incentives and a continuation of the drive towards self-sufficiency.

In this at least, sector leaders and the government appear to be aligned in their ambition, if not in how it is realised.

Former communities secretary Eric Pickles told LGC before the election that should be the “direction of travel”. He pointed out, perhaps somewhat disingenuously bearing in mind the impact of central cuts, that 70% of local authority income was now raised locally “thanks to our local government finance reforms” and there was scope to do more.  

Paul Martin, chief executive of Wandsworth LBC and finance spokesman of the Society of Local Authority Chief Executives & Senior Managers, told LGC that “every local authority would like to achieve financial independence” but he acknowledged that goal would be more challenging for some than for others.

“In the past five years we have had some clues as to how that might happen: through the retention of business rates, new homes bonus and community infrastructure levy,” he said. “We have seen some things we can build on.”

The Conservatives have committed to increasing the proportion of business rates income that councils can keep, which is currently 50%. However, this may not be as straightforward as it seems as it would require the complex system of top-ups and tariffs – designed to ensure there are no big winners or losers – to be adjusted. The government may wish to wait until 2019-20 when it has scope, under its current plans, to increase public spending.

The current new homes bonus scheme comes to an end in 2016-17 and Mr Clark and his team will need to make a decision about whether to renew it, reform it or scrap it. Were they to decide not to renew it this would mean more money for revenue support grant as the majority of the bonus is currently paid through a top slice to the grant. However, this would disadvantage many, mostly Tory districts, which as LGC has reported are becoming increasingly reliant on this.

Widespread devolution to cities has the potential to support the move to self-suffiency in some places by giving groups of local authorities powers over other budgets which could help generate growth, particularly if councils are given greater powers to set and raise taxes locally. However, it appears the approach announced by Mr Osborne last week would benefit northern city regions, not shire England.

The Independent Commission on Local Government Finance recommended that funding should be devolved to sub-regional areas and redistribution left largely to authorities in those regions to sort out. Outgoing Local Government Association chair David Sparks (Lab) has pledged to lobby the government for the introduction of these reforms, warning that without them some councils would go bankrupt over the next five years.

Most senior figures doubt that would actually happen but there is agreement many councils are on a knife-edge and quality of services is likely to suffer further. Mr Clark and his bosses could find themselves with some unwelcome political headaches if the impact of local government cuts becomes more visible to the public and the media over the next five years.

Recent court rulings also raise the spectre of councils being severely constrained in the cuts they make or how they provide services. Last week the Supreme Court significantly widened the definition of vulnerability for someone presenting at a council as homeless and ruled local authorities could not take their available resources into consideration when setting criteria for vulnerability. The DCLG will have to update its guidance as a result and Mr Clark will no doubt face requests for new burdens funding.

This follows the other recent ruling making it harder for councils to house people out of their boundaries. A few more decisions like this on the standards and eligibility of services could have extremely difficult consequences for Mr Clark and the new government’s funding cuts.

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