Local councils are facing a £5.8bn shortfall by 2020, including a £2.6bn shortfall in adult social care funding.
Local government services have borne the brunt of the last six years of cuts, bigger than any other part of the public sector. The Institute for Fiscal Studies estimates that between 2010 and 2020 local authorities will have had their direct funding cut by 79%.
If the Local Government Finance Bill is to be judged on the totality of resources to support local services, it has clearly failed.
However, if we are serious about devolution and the ability of local communities to have the discretion to make and be accountable for policies and services that meet local demands and expectations, we need to develop a local government finance system which enables local authorities to have a greater ability to raise and secure the money and resources themselves; councils should not just be there to administer the money the government gives them. Any such devolved financial framework, however, will also have to address the issue of equalisation, recognising different needs and different capacities to raise resources locally.
Thus, although any sustainable settlement for devolution will have to delegate the responsibility and accountability for setting taxes, fees and charges locally, rather than be reliant on the whims of governments, there will still need to be an element of central funding to address structural inequalities.
So, these are the basic tests against which the bill must be assessed. Does it take us along this path or not?
First, some context. Even with this bill, the UK remains the most centralised country in western Europe.
Second, despite ministerial claims, this bill isn’t revolutionary. It leaves local authorities relying on council tax, which raises about 28% of total resource. It is the only tax in central and local government that needs a referendum to increase it beyond a given amount; the banding is determined centrally; and the valuations are based on 1991 levels.
Third, so far as business rate retention is concerned, the bill makes possible 100% retention of the growth in business rates but with no power to determine multipliers, except to reduce them. To pass the test, councils should have the ability to determine business rate multipliers at a local level, even if on a joint basis with other councils, exactly as they could up to 1990.
Fourth, by far the biggest challenge is how the need to give incentives for development is married with the need for equalisation, recognising that some councils cannot grow their base as rapidly as others but still have needs that are high and that might grow in future. Trying to do this with one tax is a bit like playing a round of golf with one club. Equalisation is never simple, but it could become more complicated because it is now being addressed as part of the business rate system. It is clear that the jury is still out about whether it is possible for one tax to do two competing things: equalise and incentivise. I have my doubts.
Fifth, I remain far from convinced about whether the new arrangements can balance the requirement for stability with the need for sensitive and regular resetting. Reset too often and incentives for development are reduced. Reset too infrequently and the gap between the rich and the poor can grow unacceptably.
Sixth, if we are going to devolve powers to take account of the extra money local government overall will get from business rates, they must be powers that are relevant to business mainly in relation to transport, skills and economic development. Businesses could then understand their taxes are, in general, related to business activities in their area.
Seventh, we cannot judge this new system without considering social care. Social care demands are likely to increase faster than income from business rates. If we are relying on income from business rates to fund social care in the long term, there is bound to be a growing disparity. If we build that into the system right at the beginning, the system will never succeed in doing its job. As it stands, this bill fails on that score. There needs to be an independent look at social care and its future funding.
Eighth, chancellors love playing with business rate relief. If future changes reduce rate income how will councils be compensated if there is no grant mechanism in place?
Overall, I decided to support the bill in principle, because it moves towards more devolution, giving councils more powers and a little more control over the money they raise for the services they deliver. I cannot agree that it is revolutionary, but it is a small step in the right direction.
The Local Government Finance Bill 2016-17 will enter the committee stage on 21 February
Clive Betts (Lab), chair, communities and local government committee