Uncertainty and more cuts for local government funding?


By Adrian Jenkins, Director, Pixel Financial Management, partner of the CIPFA Funding Advisory Service

Prospects for local government funding hinge on the general election in May 2015. The political ramp-up to the election could result in some short-term changes and tinkering with the grant funding that is available. And after the election, changes are inevitable, regardless of the election outcome, but a change in government could result in a new set of winners and losers.

The commonly held belief is that the funding for local government is now locked-down for 2015-2016. But there is still scope between now and the next election for the government to make changes that will change funding for both in terms of quantum and, more likely, in terms of distribution.

The key events between now and the election are the Autumn Statement in early December, the provisional settlement later in December and the Budget probably in March. On all these occasions, ministers will have the chance to change funding, council tax or the rates retention scheme. And it will be their last chance to do so before a potential hand-over of power. Of course, there are limits to what they can do. They have already announced provisional numbers for the 2015-2016 settlement, there is nominally a freeze in the funding formulae, but there is always the scope for ministers to use their discretion.

One example is to provide additional funding to rural authorities. This has been something ministers have done in each of the last three settlements but without ever awarding big cash sums. On the other hand, the rates scheme safety net is likely to cost far more than the provision made, so there is the chance of deeper cuts to fill the gap. And there are other changes that ministers might be forced into to protect themselves. The funding for the NHS – and its impact on local authorities through the Better Care Fund – has the potential to be politically sensitive, and already looks like there could be back-tracking on the funding that is supposed to flow into local government.

The current government has followed a very clear agenda of rewarding growth in housing and growth in business rates. In contrast to the approach of previous governments, funding doesn’t automatically flow to those with growing population, but has been used to reward – and incentivise – growth in housing and economic development. This has resulted in a different distribution and some very clear winners and losers. 

New mechanisms have been introduced to redirect funding, principally New Homes Bonus and the Retained Business Rates scheme. These changes have forced local authorities to engage much more with what is happening on the ground in their areas, and how this might impact on their funding. The way the funding mechanisms have been introduced also place much greater discretion in the hands of the local authority treasurer, and with that comes the ability to be much more tactical in how the system is operated - especially in making provisions for potential rate retention losses. Getting this wrong can result in big irrecoverable losses; getting it right can lead to an authority gaining significantly. And with these increasingly complex funding schemes, with funding streams from different places, comes a greater chance of “getting it wrong”.

Looking beyond the election, some things will be the same but others will change significantly and probably very quickly. The current coalition government has pursued a very clear fiscal policy which has resulted in significant funding cuts for local government. All the indications are that there will be continued downward pressure on funding for local government regardless of whether there is a change in government in May 2015 or not. But that does not mean that there would not be implications for local government funding of a change in government.

Most obviously, some current funding streams would cease very quickly. New Homes Bonus is an obvious example of funding that rewards local authorities in the south east with a growing population, and is unlikely to survive a change in government. Other changes might be less high profile but would certainly move funding around the country: for example the assumed council tax in the system is set to be 34% below the actual level in 2015/2016 and a correction would be highly redistributive. And the balance of funding between adult social care and health could change to respond to policy development and political change.

Will your authority be a winner or loser from these changes? It is very difficult for an authority to see its way through all the potential changes and all the potential variables. What is certain though is that we are in for an interesting 12 months, with plenty of changes in local government funding.