Some councils may see a fall in funding next year, despite a government forecast that councils’ core spending power could increase by 4.3% in real terms in 2020-21 compared with this year.
That finding has come from the Institute for Fiscal Studies in an assessment of the funding outlook for councils.
There was still an uncertain long-term outlook and the IFS suggested that giving councils powers to levy local income taxes might need to be considered.
It said that since funding increases have been targeted at councils with social care responsibilities it was likely that districts would see “significantly smaller increases”.
Other councils would suffer from Government plans not to renew pilots of 75% business rates retention, with pilot councils moving back to the standard 50%
Taking the example of councils in Berkshire, the IFS said this would see the loss of 5.8% of their non-schools revenues and was likely to outweigh increases in council tax and grant funding.
It said that around 20% of the fall in spending per person between 2009-10 and 2017-18 could be undone from the £1.1bn increase in grant funding – mostly aimed at social care – and an assumption that all councils would increase council tax by the maximum allowed without a referendum, taken with more modest increases in spending over the last two years.
This though would still leave spending per person 20% lower in 2020-21 than it was in 2009-10.
From 2021-22 onwards the bulk of councils’ funding is due to come from council tax and business rates but the IFS predicted these sources would not keep pace with rising demands and costs unless there were both sustained large increases in council tax and productivity improvements especially in adult social care.
The report said: “Even with council tax bills increasing at 4% a year, we estimate an additional £1.6bn of funding in today’s prices would be needed by 2024-25 to both meet projected adult social care costs and stop the revenue available for other services falling further as a share of national income.”
Policies on local government funding and social care risked coming into conflict, the IFS warned, as funding policy has prioritised locally variable financial incentives, while both the Conservatives and Labour parties had highlighted the need for more consistent social care service provision between different areas.
“The next government will have to square this difficult circle,” the IFS commented.
Options for improving council finances include cutting more services, increasing Whitehall funding, or removing some services – such a social care – from local government altogether and allowing more local taxation.
The IFS said removing responsibilities from local government “would seem to go against the recent trend to devolve additional areas of responsibility and allowing councils to raise more money locally would be the most effective solution.
It judged that local income tax “would be the most sensible option for devolution of a significant new revenue stream and local tax-raising powers”.
Concerns about tax competition between councils, and revenue inequality, “could be mitigated by restricting powers to a flat-rate local income tax” with every 1% on all tax bands raising around £6bn a year.
Elsewhere, the IFS said that council budgets are increasingly focused on meeting statutory duties, and often little else.
It said that 57% of councils’ non-education service budgets now go to adults’ and children’s social care services – with per-person spending on other services falling by 40% on average over the last decade.
It said that “if further cuts are required it may be difficult to make further cut backs to the limited amount of spending on more discretionary services still left”.
“Second, the increasing proportion of councils’ spending that goes to services which only a relatively small fraction of the population benefit directly from – like social care – might affect the willingness of local taxpayers to pay the tax increases needed to meet rising demands and costs.”
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