A new system for funding local government will be introduced by 2020-21, according to a statement from the communities secretary Sajid Javid.
On the same day as publishing the local government settlement Javid also launched a consultation on the methodology for local authority funding.
Additionally, he said councils would in future be able to increase council tax by up to 2.99% without the need for local referendums. DCLG estimates this could raise £250m.
On business rates Javid said the proportion that could be retained by councils would rise from 50% to 75%, also by 2020-21.
The 100% business rates pilots have now been expanded to include twice as many authorities than previously announced.
There was also a statement that DCLG will work on ways of confronting the problem of “negative revenue support grant” — the process where changes in RSG have led to “downward adjustment” of business rates top-up or tariff for some local authorities.
Javid said: “The current formula of budget allocations has served councils and communities well over the years.
“But to meet the challenges of the future we need an updated and more responsive distribution methodology.
“One that gives councils the confidence to face the challenges and opportunities of the future.
“So I am today publishing a formal consultation on a review of relative needs and resources.”
Fair
Response to the statement was mixed. CIPFA welcomed the consultation but worried that a promise to produce a social care green paper next year was not accompanied by a commitment to more funding.
Rob Whiteman, chief executive of CIPFA, said: “The increase in business rates retention from 50% to 75% will be welcomed by councils that already have a strong business base, but it will mark a challenge for higher need councils, especially those with lower economic growth potential.
“The sharp change in direction over recent years from council tax freezes to encouraging annual increases does help to build upon the renewed localism agenda, if only to plug the funding gap created by the reduction in grants, but there are concerns that this is not a fair tax for those who are paying and may not raise income where it is most needed.”
Richard Harbord, a sector commentator and former chief executive of Boston Council, said the permitted increase in council tax failed to keep pace with inflation and that councils could hold back from taking advantage of all the potential increases.
“Politically, some councils will not wish to fully use these flexibilities,” he said.
The Local Government Association reiterated calls for the referendum limit to be abolished, and said pressure on social care, children’s services and homelessness meant that services were at a tipping point, and central government would need to find new funding.
However, Lord Porter, chairman of the LGA, said: “Greater flexibility for local authorities in setting council tax levels will give some councils the option of raising extra money to offset some of the financial pressures they face next year.”
He added: “We look forward to continuing our work with the Government on further business rates retention and the Fair Funding Review and remain clear that the extra business rates income should go towards meeting the funding gap facing local government and no council should see its funding reduce as a result of a new distribution system.”
Inadequate
Social care experts criticised the funding settlement. Margaret Wilcox, president of the Association of Directors of Adult Social Services, said the council tax increase would not be enough.
“Allowing councils to increase council tax by one per cent next year is woefully inadequate to address the funding gap facing adult social care, raises least funding in the areas of greatest need and is not the best solution to address the impending crisis facing the sector,” she said.
Paul Dossett, head of local government at advisers Grant Thornton, warned the “ongoing sustainability” of key local authority services “remain at risk”.
He described the increase in business rates retention to 75% as a positive sign but added that council increases may be nullified by a rise in the pay cap.
“The settlement recognises that the council tax increase really only reflects the prevailing inflation rates that councils are already paying, but won’t cover the impact expected from the relaxation of the pay cap,” he said.
