The local government funding allocation system is poorly targeted towards estimated needs and requires reform, according to the Institute for Fiscal Studies (IFS).
Many deprived areas are getting a lower share of local government funding than they are estimated to need, the organisation said in its latest report.
The “mismatches” are system-wide, with only 39 areas out of 150 assessed in the report receiving a share of funding that is within 5% of their share of estimated spending needs.
Wokingham, for example, received a share of local government funding that was 45% higher than its share of estimated needs, while Hounslow received 31% less.
These large differences only partly reflect local choices around revenue-raising, the report noted, and are largely due to the government prioritising other objectives in the local government funding system.
The IFS report’s authors, senior research economist Kate Ogden, associate director David Phillips, and research economist Max Warner, said reform was needed “especially if the government is serious about tackling geographical inequalities and ‘levelling up’”.
They said the system funding local government, accounting for the needs and revenue-raising capacity of different areas, has “broken down”. Even if all areas set the same council tax rates, the south east of England would still receive a share of funding that is 9% higher than its share of estimated spending needs, and the north east 5% lower, they found.
“This means there is inconsistent funding across the country for services such as social care, housing, transport, leisure centres and libraries,” the report authors stated.
Local government is one of five key public services across England covered in the report, with the NHS, schools, the police and public health being the others. Along with local government, police and public health funding allocation systems were considered the most in need of reform.
While progress has been made on better understanding the links between funding, service quality and outcomes for the NHS and schools, the report noted that much less is known about these links for local government services, “making this a priority for future research”.
The report concluded: “Much could be done to improve how funding for public services is allocated between areas. The government’s estimates of the relative needs of different areas for spending on local government, police and public health have not been updated for a decade, and rely on data from even longer ago. The government should update these estimates, and use them in a fair and transparent way when allocating funding to different areas.”
Alongside the report, the IFS has launched an interactive online tool which allows users to see estimates of funding and relative spending needs – and the gaps between them – in each area of England.
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On the conclusions of the report, Ogden commented: “Funding systems for public services are trying to balance a range of different aims. But if one of the aims is for people to be able to access consistent public services across the country, then the current systems are not fit for purpose. Differences in levels of funding for local government, police and public health services across England do not reflect today’s patterns of need as they are based on data that are now years out-of-date.
“Addressing this issue will take several years at least and will create losers as well as winners, which will be particularly obvious when overall funding is constrained. But, the government should commit to – and set out a time frame for – the necessary reforms if it is serious about making funding systems fit for the future and aligning funding for public services with its goals for ‘levelling up’.”
What reform might like look
If the government did commit to reform, the report said that it might “want to go beyond aligning relative levels of funding more closely with estimates of relative spending needs. It could, as with the NHS, provide explicit ‘top ups’ to areas with high needs so that these areas can offer better quality public services, in order to go further in narrowing inequalities going forwards.
“Based on the current formulae used to estimate needs, this would redistribute funding from more-affluent to more-deprived places for local government, and from more urban (often deprived) to more-suburban and rural (often more affluent) areas for public health. At the very least, the government should update the data used in these formulae – it will be able to do this more comprehensively than we have.”
But updating data is “not enough”, the report authors said. “Changes to the activities that public service providers spend their money on, and changes in the technology and processes by which they carry out their work, mean that the relationship between local characteristics and spending needs will have changed. For example, children’s social care services take up a larger share of local government spending than historically, and the costs of foster and residential care and support make up a bigger share of this budget line too. The government should update the formulae themselves to reflect these changes.”
Given updated estimates of spending needs, the government then needs to ensure they are used as part of funding systems that are “transparent, in particular about how they trade off spending needs against other objectives – such as providing financial incentives for growth, local discretion on spending levels, and stability and certainty in funding levels from year to year”. The report said: “The gaps between estimated needs and funding (at least under current spending needs formulae) are so large that it will likely take several years to move to new ‘target’ funding allocations, but providing clarity on the direction of travel will help local service providers plan effectively.”
Jo Bibby, director of health at the Health Foundation – which funded the research – also called for reform. “The funding local government receives is critical for the building blocks of good health, such as secure housing, good education and green spaces. There must be marked improvement in funding allocation, transparency, and support for local areas to address specific needs,” she said. “Without this, we will not see reductions in the inequalities across the country that all our policymakers, regardless of party, have committed to tackling.”
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