| 7 mins read
Local government in England is facing unprecedented financial pressure and distress. Austerity and funding reductions from 2010 drained the sector of resources which have been only partially replenished following the pandemic. Increases in population, service demand and complexity, and provision costs have out-stripped local government’s capacity to deliver its statutory responsibilities especially for adult and children’s social care, special educational needs and disabilities, and temporary accommodation. Forty-two (~10%) of the 317 local governments in England have needed ‘Exceptional Financial Support’ from national government. Seven local governments have had to issue Section 114 notices reporting their inability to balance their annual budget under the Local Government Act 1988.
Such financial crises are not new, nor is local government’s reputation as a ‘Great Survivor’ coping with recurrent financial pressures. The contemporary version is more of a ‘polycrisis’ of ongoing, cascading, and interlocking crises unprecedented in their disruption, volatility, and uncertainty. This situation matters because it is jeopardising local people’s access to essential local public services, leaving social needs unmet, and feeding discontent and populist politics.
The current Labour Government is seeking multiple benefits from linking reforms in devolution, reorganisation, and finances. The risk is that changes are incremental modifications that fail to fix the problems on a lasting basis and defer the more fundamental questions about what local government is for and how it can be funded? Local self-government ideas can inform a more radical form of the overhaul being pursued to formulate and deliver the more lasting changes required. Given its closeness in people’s everyday lives and relatively more trusted status, fixing local government’s finances can make it more able to deliver the positive changes national government seeks for people in places.
Agency and/or structure
Previous Secretaries of State diagnosed financial distress as local bad decisions, mismanagement, ‘unmerited’ risk-taking, and poor governance. Others saw the funding system providing insufficient resources to match local government’s legal duties. The NAO recognises agency and structure in “some failures of local leadership and decision-making” and “system-wide issues are driving general financial distress across the sector”. In the highly centralised governance and funding system, local government lacks the autonomy to raise local revenue to close the gap created by the reduction of central government grants from 2010 and manage increases in service demand and provision costs.
Detecting and responding to systemic risks and failures
While recently strengthened, the Ministry of Housing, Communities and Local Government’s (MHCLG) ability to detect system-wide risks and individual cases of failure is patchy. This is because of the ongoing local audit crisis (the subject of consultation and the establishment of a new Local Audit Office), reliance upon local governments acknowledging their problems and approaching the MHCLG for support, dependence upon using ‘Exceptional Financial Support’ that incentivises asset sales and borrowing to plug gaps in revenue expenditure, and data gaps. The warning sign detection system is too ad hoc, informal, and opaque to anticipate and prevent financial meltdowns.
Repeated deferral of proposed reforms
Action has been insufficient to address systemic weaknesses in local government finances. The complex system is increasingly difficult to change. It remains low as a national government priority and politically sensitive in creating ‘winners’ and ‘losers’ across England for people’s local public services and taxes. Council Tax valuations are based on 1991 property values. Needs assessments used in funding formula calculations are a more than a decade old. Business rates retention system reset to enable redistribution between high and low growth areas has been repeatedly delayed. Moving from single to multi-year funding settlements has been deferred until now. Local government needs and resources are increasingly out of kilter, out-dated, and unfair. Increasing proportions of budgets are spent on services for smaller proportions of local people. Reductions in local services and increases in local taxes have stoked discontent and populism.
What is to be done?
The current Government recognises increasing service demands and costs and delayed funding system changes are “putting an unsustainable burden” on local governments. NAO calls for a more coherent ‘whole of government’ approach to local government financial sustainability, longer-term prevention, financial data improvement, and resolution of current system dysfunctions.
The risk is that changes are only incremental modifications that treat the symptoms and are insufficiently radical to fix the causes of the problems generated by the existing system. Muddling through is a recurrent feature of local government finance history in England. Recent patches continue the trend: unplanned funding injections; continued and growing use of EFS; and temporary Council Tax increases. The history of repeated financial crises suggests relying upon HM Treasury to provide the spending framework to make local government financially sustainable is unwise. Reorganisation has reignited interest in structures, tiers, boundaries, and population thresholds amidst dated and inconclusive evidence that any specific type or size of council is more effective in its financial management and sustainability.
In the current polycrisis the fundamental questions of what local government is for and how it can be funded risk being left unanswered yet again. Local government in England remains an international outlier. It is more of an agent of central government administering and delivering local services in its area than a democratically accountable local tier of the state governing place. Revisiting local self-government principles can underpin the constitutional protection and articulation of its autonomy, powers, and resources. This change can remedy its unmoored position as a creature of Parliament and victim of political cycles and unfunded mandates of legal responsibilities unmatched with appropriate funds to deliver them.
Local government funding needs the agency to set the ‘rules of the game’, autonomy to make decisions locally; the ability to raise income unilaterally without permission from national government; respect for local priorities; access to national and international capital markets; and proportionate redistributive measures to protect less financially resilient local governments. Using these ideas can support the more radical changes needed for local government more fully to contribute to achieving national government’s goals.
Digested read of a forthcoming journal article produced by the author.
