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Fair funding formula proposals spark concern from urban areas

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The 2019-20 provisional local government finance settlement brought few surprises for the coming year, the final year of a four-year settlement. More significant for the sector were the accompanying consultations on the funding of local government from 2020 onwards.

Setting out high level proposals for a new funding formula and changes to the distribution of business rates, the two consultation documents mark one of the biggest shake-ups of council funding in living memory.

Proposed weighting of new funding formulae

Counties welcome council tax proposal 

As currently proposed the new system would see the introduction of a single per capita foundation formula for upper and lower authorities, for which population is the only cost driver, alongside seven service-specific formulae covering areas such as adult social care and children and young people’s services (see graph).

John Fuller

Fair funding formula proposals spark concern from urban areas

Jonh Fuller, District Councils’ Network

Fast growing areas have welcomed the weight being given to population projections, as opposed to historic data, but complex modelling within the service-specific elements has so far made it hard for councils to determine whether the new arrangements will leave them better or worse off.

Deprivation will be taken into account across four of the service-specific formulae - adult social care, children’s services, public health and fire & rescue -  while rurality is to be reflected in a new cost area adjustment methodology to be applied to the foundation formula.

A formula which is principally based on population, and more importantly population projections, is a very welcome development

John Fuller

Rural areas have been buoyed by the prospect of their needs being placed on an equal footing with those of their urban counterparts.

They too have been the chief beneficiaries of the government’s announcement that it would cover the £153m cost of negative revenue support grant, which would otherwise have seen 168 councils paying money back into central government, and a £16m increase to the rural services delivery grant.

The apparent largesse towards rural areas will not go unnoticed by cities, which are keen to ensure that funding is not diverted away from urban areas grappling with high levels of deprivation.

Geoff Winterbottom, principle research officer for the Special Interest Group of Municipal Authorities, said most of the group’s 47 members would be disappointed to see that deprivation had been excluded from the foundation formula, while account had been taken of rurality.

“We feel there are two different standards of evidence at play there,” he said. During discussions, the Ministry of Housing, Communities & Local Government had warned against conflating deprivation and density – and yet in the formula, neither had been included. The illogicality of the proposed system and the lack of explanation behind it were both frustrating, he said.

London boroughs are likely to raise concerns over the lack of recognition of funding pressures that apply in the capital, such as homelessness and the care of unaccompanied asylum seeking children.

The new foundation formula will be of particular importance to lower tier authorities, as it will determine the distribution of the vast majority of their funding [see graph].

According to John Fuller (Con), chair of the District Councils’ Network, district councils will benefit from a system which will distribute funding on the basis of information which is both up to date and genuinely local.

“A focus on a foundation formula which is principally based on population, and more importantly population projections, is a very welcome development,” he says.

“Also, every district will have its own bespoke area cost adjustment which will mean a much greater level of granularity in ensuring the true costs of running services can be best reflected.”

The government is hoping that changes to business rates retention will simplify the system while driving up incentives for councils to promote economic growth in their area.

Next year, 15 mainly county areas will pilot 75% business rates retention. In addition, it was announced that Greater London authorities would also pilot 75% retention – a disappointment for the capital, which, along with five devolution deal areas and 10 local authority pools across the country, had this year been enjoying 100% retention.

The question of how business rates income should be divided up between billing and precepting authorities is now under scrutiny, with the government detecting an “appetite for change” in the sector.

Geoff Winterbottom, principal research officer for Sigoma

Fair funding formula proposals spark concern from urban areas

Geoff Winterbottom, principal research officer for the Special Interest Group of Municipal Authorities

Every authority has a role in promoting economic growth, it says, and that should be reflected in the incentives on offer. The appropriate split between counties and districts is to be determined later in the process, opening up the potential for a row between the tiers.

Business rate pools could also decide locally how the proceeds of growth should be shared amongst member councils, but some fear the additional local autonomy could be undermined by unseemly and time consuming annual skirmishes over funding.

However, the success of the pilots to date in agreeing tier splits locally augurs well, according to Cllr Fuller.

We feel there are two different standards of evidence at play there

Geoff Winterbottom

“The principle should be that where areas are able to agree amongst themselves, they should be allowed to, and ministers should step in where it is not possible,” he says.

Counties agree on the need for a fall-back position where agreement cannot be reached. “There must be a nationally defined minimum tier share as a fall back default position for areas that do not agree locally,” said a spokesman for the County Councils Network.

“The pilot tier shares show there is room for local flexibility, but one off pilot arrangements are different to establishing the long-term principles for council funding.”

The Chartered Institute of Public Finance & Accountancy said the opportunity to increase business rates retention would be encouraging for most councils. “But, being conscious that every council is different, good financial management will be essential in managing risk,” warned local government policy manager Joanne Pitt.

Proposed weighting of new funding formulae

Graph: Proposed weighting of new funding formulae

Fair funding formula proposals spark concern from urban areas


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