Local government finance: is equalisation inching back?

Building on the introduction of the Business Rates Retention Scheme in 2013, a raft of major changes to local government funding have been announced in 2015. By the end of the 2015-20 Parliament, local government will retain 100% of business rate revenue instead of 50%. Revenue Support Grant will be phased out. Additional funding for social care will be made available. These changes will interact with a continued reduction in overall levels of central funding for local government, which have been trailed in the draft local government finance settlement for 2016-17.

The combined effect of these changes could be considerable. The local government expert Tony Travers has dubbed the Chancellor, George Osborne, and the Secretary of State for Communities and Local Government, Greg Clark, “revolutionary radicals”.[1] Similarly, Kevin Muldoon-Smith and Paul Greenhalgh, of the University of Northumbria, claim that “local authorities will be expected to fend for themselves through a new model of civic financialisation and entrepreneurialism”.[2]

The incentives within the current system

These interpretations reflect the planned increase in locally retained business rate revenue under the Business Rates Retention Scheme; and the phasing out of Revenue Support Grant, historically used for equalisation purposes. The Retention Scheme was introduced in 2013, to incentivise individual councils to promote economic growth by allowing them to keep the extra rate revenues from new business properties. The previous Government described it as “a total change away from the begging bowl system to a reward-and-incentive-based system for local authorities”.[3] Moving from 50% to 100% retention would, on the face of it, strengthen the link between economic growth and the funding available to councils.

However, a close reading of the 2016-17 draft settlement documentation suggests a more nuanced picture. A number of elements in the settlement are equalising in intent and would mitigate the degree of self-reliance of, and tax competition between, local authorities. It is possible to identify at least three such elements.

Social care funding and a needs-based formula

First, responding to concerns from a variety of sources about social care funding, additional money will be provided via an expanded Better Care Fund and a higher threshold for council tax referendums (the ‘social care precept’). Better Care Fund monies will be distributed to social care authorities using the 2013 adult social care relative needs formula, taking into account each authority’s council tax revenue-raising capacity. Thus, central funding will be distributed so as to compensate for some authorities’ low capacity to raise extra revenue.

Core funding and revenue-raising capacity

Second, the Government intends to ensure that similar authorities receive the same percentage change in ‘settlement core funding’.[4] In future, this will take each authority’s council tax revenue-raising capacity into account. The pre-2013 funding system did this across the board, to try to ensure that authorities with less revenue-raising capacity could provide equivalent service levels; but the Retention Scheme took no account of it from 2013 to 2015.

Adjustment to Retention Scheme tariffs

Third, as settlement core funding continues to reduce, some authorities will see their Revenue Support Grant reduce to zero during 2015-20. These authorities will have to increase the amount they pay in to the ‘central pot’ to be redistributed (their ‘tariff’ will increase), to ensure that their settlement core funding is cut by the same percentage as their counterparts.[5]

The Retention Scheme’s incentive structure was founded on tariffs staying the same until 2020. This allowed councils to encourage business growth and development over many years, anticipating a certain growth in business rate revenue. Adjusting tariffs annually in this way would cut across this incentive. The fact that the Government is willing to do this in the service of equalising funding reductions across local authorities suggests that, between 2016 and 2020, equalisation will complement, or may even outweigh, the incentive principle within the Retention Scheme.

The longer-term implications

Whilst the shift to 100% business rate retention could mean that these effects are short-lived, the Government has stated that the tariff and top-up system will be retained. If Revenue Support Grant is abolished by 2020 as planned, adjusting tariffs would become the key tool for a Government that wished to continue to control the distribution of funding between authorities.

It is far from clear what effect these shifts in Government intentions will have on funding outcomes. Local authorities’ funding is highly sensitive to influence from many quarters, ranging from changes in legal duties, to levels of specific grants, to the outcomes of business rate appeals. But the equalising tendencies within the 2016-17 settlement suggest that a world of far-reaching, competitive fiscal devolution may not be in sight quite yet.

[1]               Tony Travers, “Greg Clark and George Osborne are revolutionary radicals”, Local Government Chronicle, 18 December 2015

[2]               Kevin Muldoon-Smith and Paul Greenhalgh, “Making sense of fiscal devolution in public-sector service delivery”, Sheffield Political Economy Research Institute, 22 December 2015

[3]               Brandon Lewis, then minister for local government, HCDeb 12 Feb 2014 c932

[4]               DCLG, The provisional Local Government Finance Settlement 2016-17 and an offer to councils for future years, December 2015, p task management online. 13

[5]              See DCLG, Key information for local authorities, column X

Picture Credit: Manchester Town Hall by Richard Hopkins, Creative Commons Attribution 2.0 Generic (CC by 2.0)