Government proposals to compensate authorities suffering negative revenue support grant (RSG) are unfair on deprived urban authorities, according to representatives of municipal councils.
The Ministry of Housing, Communities and Local Government this week released a consultation aimed at helping councils which face the prospect of a downward adjustment of their business rates in 2019/20 due to the phasing out of RSG.
It proposes compensating affected authorities for any losses through the funding formula, at a cost of £153m, continuing the approach adopted for the past two years.
The consultation paper said: “In addition to being the only option which is both affordable and fair, dealing with negative RSG in its entirety, this approach represents the most direct and simple solution to the problem.”
The government has also outlined other potential approaches, including allocating new funding on the basis of existing relative needs formulas.
But it concluded that “even when modelling for significant additional funding (£500m), these options similarly prove themselves of limited effectiveness in addressing negative RSG.
“The quantum of funding needed to completely eliminate negative RSG through this methodology is excessive, totalling over £2bn. This level of funding is not affordable.”
But the government’s preferred approach drew criticism from SIGOMA – which represents 46 metropolitan and unitary councils in England.
Geoff Winterbottom, principal research officer at the organisation said that 145 of the 168 authorities who would have been adversely affected by the negative RSG issue in 2019 will be shire district councils.
He said: “The government has released data showing the extent to which districts have benefited from the retention of business rates compared to baseline funding.
“The amount of business rates retained by districts on average has grown by more than 60% in 2018/19.
“These authorities are in a position where they are collecting more than they need to provide their services.”
Winterbottom called for the government to distribute any extra funding available to the sector on a needs-based formula in order to help the poorest authorities.
He said: “When the four-year settlement for local authority funding was announced, the biggest losers were metropolitan districts. The majority lived with it and signed up to it, but now they are being punished further.”
John Fuller, chairman of the District Councils’ Network, said he was “delighted” that the government had listened to the concerns of his members.
He said: “Today is a significant victory for district councils, but we must continue to push for the further financial freedom our districts require.”
John Betts, head of finance at Warwickshire County Council also welcomed the government’s efforts to resolve the issue of negative RSG.
He said: “The preferred option in the consultation, the direct elimination of negative RSG via forgone business rates receipts, looks sensible and is worth exploring further.”
The announcement of the consultation came in a wider consultation on next year’s local government finance settlement.
Among other proposals, the government said that it was considering adjusting the baseline for housing growth – currently 0.4% a year – below which the New Homes Bonus would not be paid.
The consultation said: “The government has retained the option of making adjustments to the baseline in future years to reflect significant additional housing growth and to remain within spending limits set at Spending Review 2015.”
However, Richard Watts, chair of the Local Government Association’s resources board, said: “We would urge the government not to increase the New Homes Bonus threshold again.
“This would risk putting the brakes on housebuilding schemes and growth-boosting projects at a time when our housing shortage is one of the biggest challenges facing the nation and further exacerbate the financial challenges facing some councils.”
The government consultation raised the prospect that the New Homes Bonus will be scrapped from 2020-21, when a new spending review period begins.
It said: “…it is the government’s intention to explore how to incentivise housing growth most effectively, for example by using the Housing Delivery Test results to reward delivery or incentivising plans that meet or exceed local housing need.”
