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12 June 2012updated 02 Sep 2021 5:09pm

Our local government finance system is broken – and the Tories know it

England’s local government finance system, already rife with inefficiency and inequality, is on the verge of collapse.

By Steve Reed

The Treasury likes local government to be dependent on decisions made at the Chancellor’s desk, and the latest round of cuts detailed by this week’s local government finance settlement are no different: Osborne set them, the Department for Communities and Local Government delivered them, and councils have to live with them.

This mentality has left England’s local government finance system, already rife with inefficiency and inequality, on the verge of collapse. Even London – currently the most devolved authority we have – relies on central government for three-quarters of its funding. Our cities have been competing economically with one hand tied behind their back: in New York the comparative figure is 30 per cent, and in Berlin 25 per cent.

Increased local responsibility for budgets would create incentives to innovate and modernise how people engage with their local services. There is ample evidence to suggest that the more decentralised local government is, the more efficient it is too. And the most successful efforts to end inequality can be found in countries with comparatively high freedom to run their own finances: Finland, for example, has one of the lowest income inequality rates in the EU and one of the lowest dependencies on central funding.

Change is long overdue in England but the Tories refuse to trust local government. At each stage of the government’s devolution legislation, Labour has proposed greater powers for local government over budgets: multi-year finance settlements; local control over tax rates and discounts; greater financial freedom.

The Tories rejected every single proposal.  

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Instead, they are presiding over an increasingly short-term approach, cutting local government to meet their already missed deficit targets while missing opportunities for local communities to play a bigger role in rebuilding the nation’s economy. Because of their timid refusal to let go, the government’s 2 per cent council tax rise for social care and full retention of business rates look like nothing more than sticking plasters over a gaping wound.

Despite the extra £1.5bn investment in the Better Care Fund, social care still faces a funding crisis. Should every council in England raise council tax by 2 per cent as the government suggests, by 2020 the extra funding would amount to £3.2bn. That’s over £1bn short of a social care funding gap which even the Tory-led Local government Association estimates to be £4.3bn, with no announcements about how the funds will be distributed fairly.

Business rate devolution will make the system’s inherent inequality even worse, unless there is an effective equalisation measure. Westminster Council accounts for 8 per cent of England’s business rates income; more than Birmingham, Manchester, Sheffield, Liverpool, and Bristol combined. The services our communities depend on will be even more susceptible to dramatic economic change.

With the LGA warning there are councils already on the brink of collapse, the need for a rebalancing of England’s local government finance system has never been more urgent. There are three immediate changes the government should look at.

First, Ministers promised that details of business rate equalisation – to protect the least well off – would be made available during the autumn statement, but that didn’t happen and still hasn’t happened. The government must say how it will prevent rich communities getting even richer while everywhere else struggles to provide basic services.

Second, the detail on multi-year budgets must be made clear. As Labour has called for, and the Tories have now gone some way to accepting, successful organisations need to be able to plan for the future. Local authorities cannot plan complex services without knowing what level of funding is available to pay for them. The government’s plans for multi-year funding agreements are welcome, but they must not be a mechanism to lock in a further reduction in resources.

Third, there must be greater reform in Whitehall to ensure devolution goes beyond what we have seen so far from this government. By forcing social housing sell-offs, reducing local oversight of schools, and delivering the Work Programme from the centre, the Government are restricting local government. The Secretary of State talks warmly about devolution but his colleagues seem less convinced.

By easing the Treasury’s death-like grip on local government’s finances, we can start to build a more efficient, capable, and innovative state. The Chancellor must learn to trust councils and let go.

Steve Reed MP is Shadow Minister for Local Government

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