The government will likely need to remove some service responsibilities from councils if it wants to end grant funding without granting new tax-raising powers, according to the Institute for Fiscal Studies (IFS).
In a report released this week, the IFS said that even if council tax increases continue at this year’s level of 4.7%, adult social care will swallow up half of local tax revenues by 2035.
The institute said the current situation of “muddling along” is preventing councils and central government undertaking proper long-term planning.
The report said: “A proper national debate is needed on this, which has so far been lacking.
“Without it, we will default to a situation where the services councils provide are gradually eroded without any explicit decision being taken – until ad hoc funding is found as a response to political pressure.”
The debate, the report said, needs to come to a decision on whether the public is willing to meet rising costs and demands over coming decades, or accept lower expectations of what councils can provide.
In addition, a tension between the ability of councils to raise revenue locally and variation in standards of services must be resolved, the IFS said.
It said: “So are we willing to accept greater differences in services between different areas in exchange for greater local control?
“Or should redistribution, ring-fenced funding and common standards be a central feature of the funding system?”
In 2015, the government announced that it would allow councils to levy an additional 2% social care precept on top of the 2.99% they are allowed to raise the charge by each year.
In 2016 ministers announced that for the three years up to 2019/20 councils the precept would rise to 3% in any given year but no more than 6% in total over those years.
In March, government statistics showed that the average Band D council tax set by local authorities in England for 2019-20 will increase by 4.7% to £1,750.
Even though the social care precept runs out this year, the IFS said that increased by this level each year would mean the proportion of council spending on social care rising from 38% to 50% over the next 15 years.
Without the precept, rises of just 3% would mean that proportion rising to 60% over the period.
“Therefore,” the report said, “one of three things will very likely need to happen at some stage: councils will have to be relieved of some of their responsibilities for providing services (whether this be adult social care or other services); central government grant funding to councils will have to be retained and increased over time; or councils will have to be given access to additional sources of revenue themselves.”
The IFS also repeated its previous claim that local income tax would be the most sensible option for devolution of significant new revenue-raising powers to councils.
Writing on Room151 earlier this year, Tom Harris, UK local government research officer at the IFS, said a 1% local income tax could raise £6bn for local government.
This week’s IFS report also called on the government to publish empirical analysis of the potential effects of different policy choices before final decisions on the Fair Funding Review are made later this year.
Responding to the report, Richard Watts, chair of the Local Government Association’s resources board, said: “As this report highlights, pressures continue to grow in children’s services, adult social care, and efforts to tackle homelessness.
“This is leaving increasingly less money for councils to fund other vital services, such as the maintenance of parks, certain bus services, cultural activities and council tax support for those in financial difficulty to try and plug growing funding gaps.”
Joanne Pitt, local government policy manager at the Chartered Institute of Public Finance and Accountancy, said: “We are in complete agreement that councils’ reliance on council tax and business rates are inadequate to sustain local services as demand continues to increase, and believe that radical, long term change is needed.
“Action must be taken to alleviate the fiscal pressures faced by councils through local and more equitable tax raising powers.”
