Local government got a one-year funding deal. But, writes Adrian Jenkins, the new minister in charge also looks set to overhaul the entire funding process.
Local government funding has been in a holding pattern for at least four years. Last week’s one-off settlement was another in a series of rollover settlements. But that might be about to change.
Michael Gove—the new secretary of state for local government—has promised to reform the funding system, possibly as early as 2023-24, and he brings with him the clout of a senior and serious minister.
We have been waiting a long time for a proper review of local government funding. The formula itself was last properly updated in 2013-14. All the data within the current formula will be at least ten years old when the funding distribution is updated in 2023-24.
In fact, much of the data is from the 2011 census. Most of the formulas are even older. The social care formula dates back to around 2003, as does the main environmental, protective and cultural services (EPCS) formula. Billions of pounds of funding are being distributed on the basis of formulas that were developed nearly 20 years ago.
Much good work was done to develop options for funding reform in recent years, particularly in the fair funding review, although most of this was now done in what seems like another age.
The last consultation on funding reform was in December 2018, and very little has taken place to progress these funding proposals, at least publicly. With the passage of time, a change of government, and a complete change in policy objectives, it would be foolish to assume that ministers will simply pick up and implement the review as it was left three years ago.
Crowding
Any review of local government funding will now have a different focus. “Levelling-up” is the most important objective of this government, and Michael Gove is the secretary of state for delivering it. Changes in funding will have to show that they can help to deliver that agenda.
Previous funding consultations focussed on delivering a flatter distribution of funding, and ministers even proposed leaving deprivation out of the main foundation formula altogether. That would be inconceivable now.
A whole range of other policy objectives are also crowding in. Major social care reform will be taking place from October 2023 onwards, and a new social care formula is desperately needed to reflect the influx of self-funders who will qualify for local government support.
Consultations on the business rate retention scheme and new homes bonus will also affect how the funding system works in future.
What is more, Michael Gove is the kind of minister who will question and challenge how things have been done. Local government should prepare to have some of its own assumptions challenged.
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Backyards
And yet, the government cannot simply focus on giving more funding to “the north” at the expense of its own heartlands in the south of England.
Our own modelling has shown that even proposals made in 2018 massively reduced the funding in many affluent councils in Berkshire, Hampshire and Surrey, where Michael Gove’s own Surrey Heath consistency is located. Gove will have to balance the needs of his own backyard with delivering levelling up in the north and Midlands.
Council tax will be the biggest issue that ministers have to contend with in this funding review. It has growth considerably in both relative and absolute terms since 2013-14 and will account for around 60% of core spending power in 2022-23, though it is very unequally distributed between authorities.
Equalising council tax income will re-distribute more funding than any other change. The main losers from equalisation will overwhelmingly be more-affluent councils in the south-east, and the major gainers will be “red wall” authorities.
Gove alluded to this when he appeared at the select committee (8 November 2021), but how he handles this very tricky issue will tell us a lot about how far he is willing to go to level-up.
Ministers will not want to cause too much disruption and change within the funding system. Huge swings in funding will create many losers who will complain loudly. Mitigating those changes in funding can make sense politically. One solution might be to leave much of the existing funding regime in place, and to create “headroom” to redistribute for levelling-up.
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Transitional
In the end, a good transitional regime is going to be essential. Funding distribution has not changed for a decade at least, and it would be unreasonable to expect anyone to force through funding changes too rapidly. It seems very unlikely that damping would be frozen, as was the case in 2013-14; any transitional support will be time-limited.
Our preference would be to focus on designing the transition system as an integral part of the reforms, rather than as an add-on late in the process. A well-designed transitional system can help authorities with their medium-term financial and service planning.
Changes in local government funding now seem inevitable in the very near future. Levelling-up will be an important factor in influencing those changes: Gove will have to show that the “red wall” is gaining from any changes in distribution. But the pre-existing concerns and constraints will remain. Ministers will want to limit the scale of any disruption – and authorities in more-affluent parts of the country cannot be forgotten. It looks like this year’s is the last of the boring rollover settlements.
Adrian Jenkins leads the funding advisory service at Pixel Financial Management.
Homepage image: Richard Townsend.
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