Local government: In the money?

In the second of three essays LGiU is publishing on the future of local government, Jennifer Glover discusses the unprecedented financial uncertainty facing councils through the testimonials of senior local government decision-makers.

Given the political turbulence of 2017 so far, it was perhaps inevitable that some important policy issues dropped from the agenda. It is unfortunate, however, that one such issue was local government finance reform.

The 2020 deadline for the transition to 100% Business Rate Retention seemed ambitious when set by George Osborne in October 2015; after two years of consultations the details have not yet been conclusively decided and it now seems even more so. Meanwhile, each year's Funding Settlement has and will continue to see the Revenue Support Grant fall steeply until it disappears altogether by 2020. No one knows exactly how services will be funded beyond this point. Councils are rightly wondering whether this timeline is still realistic, what the system will look like, and what they can be doing to prepare for the change.

Where are we now?

The current financial situation in local government, following public sector austerity and uncertainty around 100% Business Rate Retention, has made decision-making and budget-setting extremely challenging for councils. Core services such as adult and children's services are under strain and without a clear outline of their medium-term funding it has become difficult to balance the need for investment with the need for saving money.

Back at the start of April, before the general election had been called, DCLG was making steady progress towards a concrete implementation plan for 100% Business Rate Retention and the accompanying Local Government Finance Bill was plodding its way through the Commons. Yes, we were complaining of a lack of clarity over technical details and overarching vision, but the movement towards fiscal devolution was at least indisputably in the forwards direction.

What a difference six months makes! The snap election blew the Bill out of the water and purdah fell just as local government needed answers to some big questions. The surprise election result threw Government into turmoil and many manifesto commitments got the chop in the desperate scramble to pass a Queen's Speech. Local government was a major casualty: there was neither mention of reviving the finance bill, nor indication of an alternative plan.

Following Parliament’s summer recess, Sajid Javid began September with a welcome announcement detailing DCLG’s plans going forward. More areas are invited to apply to become pilot areas for 100% Business Rate Retention, in addition to Cornwall, Greater Manchester, Liverpool, West Midlands and West of England who began pilots in April 2017.

This will come as a relief to many, following three long months without any actionable information from the department and it is reassuring to know that the issue is on the agenda. However, this announcement can only be the start. There will be questions about how the scheme will work without legislation (as the Local Government Finance Bill is unlikely to make a reappearance in the next couple of years), what the transition plan will be for non-pilot areas and whether the 2020 RSG cut-off is still on the cards.

CC BY-SA 3.0  Nick Youngson nyphotographic.com

The challenge

We need a local government funding system that enables councils to provide quality public services, maintain a strong local democracy and invest in the local economy. For this to work, councils need enough money to meet their citizens' needs, clarity about where this funding will come from and the powers needed to control their cashflow and deliver services.

100% Business Rate Retention: Top 5 concerns among local leaders

Source: Bilal Kamoon via Flickr

Now that DCLG has confirmed that the 100% Business Rate Retention agenda is still moving forward, debate on the technical detail will be resumed. It is an opportune moment to reflect on the concerns raised by senior local government decision-makers before the election, to refresh our memories and to inform this very live policy discussion.

In this section, we use the answers gathered in our annual State of Local Government Finance survey* of council leaders, chief executives, directors of finance and cabinet members for finance, to shine a light on the sector's concerns about the move to 100% Business Rate Retention. We allowed respondents to answer the question 'What are your main concerns about the move to 100% Business Rate Retention?' in their own words – and the results tell a fascinating story.

We have chosen the top 5 most commonly cited concerns to focus on.

*The State of Local Government Finance Survey 2017 received 162 responses from 131 councils in England and Wales and was conducted throughout January 2017.

1. Business rate appeals

This was the most common concern, with 33 senior local government figures (20%) raising business rate appeals as an issue, unprompted.

Appeals are made by business owners when they believe that they have been over-charged on their business rate bill, whether because of error or because their commercial property has been wrongly valued by the Valuation Office Agency (VOA). These appeals can take some time to resolve, and it can be difficult to predict which will be successful and therefore how much will have to be repaid.

Historically, the cost of business rate appeals has been taken on by central government, but when 50% Business Rate Retention was introduced in 2013 local authorities became liable for half of the payout.

This means that authorities must now hold back large sums of money to cover potential future payouts, money which cannot be used to fund services or operations. Councils have complained that the volatility this has introduced makes financial planning extremely difficult. Indeed, the National Audit Office raised this issue in its report in March on 100% Business Rate Retention and wrote that DCLG would be addressing it in their planning.

Although details about the next steps have yet to emerge, it has been suggested that local authorities will take on the full amount if/when 100% Business Rate Retention arrives, which would amplify these problems if left unaddressed.

My main concern is...

"Ensuring protection around appeals, eg. hospitals becoming Trusts." - Unitary, Conservative Cabinet Member for Finance

"Appeals and discounts being unfunded." - District, Chief Executive

"The problem of uncertainty that appeals cause." - District, Labour Cabinet Member for Finance

"We are a top-up authority with a fragile tax base and are awaiting the outcome of business rate appeals and revaluation with constrained resources to invest in growth." - Unitary, Chief Executive

2. Business Rate Policy

The other part of this problem, linked to the appeals issue, is that central government still dictates business rate policy nationally, which means that if local authorities become reliant on business rates to fund their services, their income will still be subject to changes imposed by Whitehall.

For instance, central government decides when commercial properties are revalued by the VOA, which affects the level of business rates that councils and the Treasury will receive. This usually happens every five years, but for the most recent period the gap was extended to seven years. As a result businesses experienced a steeper rise or decline in payments than usual and, although revaluation is fiscally neutrally on a national scale, local areas saw their business rates take rise/decline more steeply too. Following complaints from businesses, DCLG then announced a £300m relief fund for small businesses who experienced the steepest rise.

Similarly, the Government still retains control of the resources given to the VOA (and therefore the speed/accuracy of the valuation and appeals process), the level of relief available and the type of organisations that can apply for relief, among other things.

It is not clear how councils would be compensated for decisions made through national policy under 100% Business Rate Retention, or whether any of these powers will be devolved. At the very least local government should be guaranteed a seat at the table when these decisions are made and should be reimbursed for losses caused by national policy.

My main concern is...

"The system needs to address the differentials in local appeals impact and performance of the VOA." - Unitary, Chief Executive

"The length of time taken to review appeals over rateable value." - Unitary, Labour Cabinet Member for Finance

"Funding the cost of appeals over which authorities have no influence." - Unitary, Chief Executive

3. New responsibilities that might be devolved

The Government has previously expressed its interest in devolving new responsibilities to local authorities alongside business rate retention but there has been no further detail given about what these responsibilities might be. 21 (14%) respondents to our survey raised this issue, expressing nervousness about which responsibilities could be devolved, whether they would have enough money to fund them and when they might find out.

Many respondents, from across the political spectrum, were wary of the intentions of central government and expressed suspicion that 100% Business Rate Retention, and fiscal devolution more generally, would be used as an excuse to move more duties into local government without adequate resourcing. For instance, the introduction of the Homelessness Prevention Act earlier this year placed several new responsibilities on local authorities but they have not as yet received what most would consider sufficient extra resource to cope with them.

My main concern is...

"Being required to take on additional services without adequate income to pay for them." - District, Labour Cabinet Member for Finance

"The government will take the opportunity to increase burdens by a greater amount than the increase in funding." - Unitary, Conservative Leader

“Responsibility for demand-led services will be devolved without adequate funding.” - County, Conservative Cabinet Member for Finance

“We will be given more responsibilities which devolved business rates will be insufficient to cover.” - Unitary, Conservative Leader

4. Whether the business rate system itself works

Is the business rate system itself up to scratch? Just under ten percent of respondents felt that the wider business rate system is flawed and is not a suitable mechanism for sustainably funding local services.

This criticism arose from a number of sources. Some respondents weren't confident that the government understood the consequences of funding (newly-devolved) demand-led services with a volatile funding mechanism like business rates, pointing out that areas with high need often have a low business rate tax base. Areas with a low business rate intake, like many counties, are also the areas most likely to have high demand for adult social care services, for example. They worried that this would lead to greater funding insecurity.

An additional factor leading to volatility, is the proposed move to change the inflation index to which annual business rate increases are linked, from RPI to CPI from April 2020. This is expected to lower the amount paid by businesses, and therefore the intake for local government.

Others echoed concerns expressed by the private sector that business rates as a form of taxation is skewed and unfair for rate-payers. Business rates are calculated using property value rather than a measure of how much money a business makes or how many people it employs. Therefore, traditional retail and industrial businesses often pay more than, say, an online retailer without any shop space or a software company operating from a small office but employing highly-skilled staff.

There are also concerns about the incentives 100% Business Rate Retention provides. It has been argued that it will merely incentivise councils to increase commercial floorspace, by attracting a new power station or retail development, rather than investing in improving existing commercial property stock or more broadly in a healthy local economy with job security, skilled industries and adult education.

My main concern is...

"Many of our businesses are internet-based or micro enterprises, so contribute to skills, employment and innovation but do not generate high business rates. Business rates may incentivise land use but not enterprise and innovation." - Unitary, Chief Executive

"Reductions in land take from robotics etc." - Unitary, Chief Executive

“In our area, we have slow land use growth (intensification of commercial use rather than property valuation growth).” - District, Lib Dem Cabinet Member for Finance

“The decline of high streets to online retail.” - Unitary, Chief Executive

“Unfair burden on commercial property companies as opposed to the growing number of internet-based companies who do not pay.” - District, Conservative Leader

5. Suspicion of central government’s motives

Far from being a party political issue, mistrust in central government was brought up unprompted by senior figures from Conservative, Labour and NOC councils alike. In fact, of the 14 people who raised this as a concern, 6 were Conservative politicians (council leaders or cabinet members for finance).

This is a striking finding, and something that ministers should take very seriously in their future discussions with the sector. Trust has been eroded between central and local government, after years of fractious relations. Because local government has no constitutional status councils are subject to changes in the Westminster political wind; thus the balance of power in this country has been skewed towards the centre in recent history.

This tension can be seen in examples such as the effective capping of council tax increases in 2011 at the same time as huge public sector budget cuts, a move that was criticized for drastically reducing councils’ financial autonomy. More recently, councils received a threat from DCLG warning them to reduce delayed hospital discharge rates ('bed-blocking’) or face social care funding cuts. With repeated requests for support tackling the social care crisis being largely ignored, the tone of this latest announcement left a bitter taste for many in local government and the policy itself seemed to miss the point.

Mutual trust must be restored if the right decisions are to be made on future funding arrangements. Arguably the devolution process went some way towards rebuilding the relationship on an equal footing by asking local authorities to shape the process to a certain extent. However, now this process has ground to a halt it’s unclear where we should be looking for opportunities to continue this tentative progress.

My main concern is...

"Ministers may pull a fast one and say, 'Oh yes you can do this as well'." - District Chief Executive

"DCLG will use this as a way of creaming off more income for the government." - District, Conservative Cabinet Member for Finance

“Central government is totally untrustworthy – we have just lost big time on the New Homes Bonus.” - Unitary, Conservative Cabinet Member for Finance

“I am cautiously confident at this point, whilst understanding that central government always conspires to take away any financial gain we secure.” - District Chief Executive

“It's a con.” - District, Conservative Leader

“Government do not keep to their word and make late changes and announcements.” - District, Conservative Cabinet Member for Finance

“Experience shows they will shift resources to rich authorities in South East and away from North.” - Unitary, Labour Leader

The bigger picture

Water Lilies by Monet. Source: Metropolitan Museum of Art

Recently, the debate on local government finance has centred around business rate retention, as this has been the policy change with the biggest immediate impact. But of course the sustainability of the system depends on more than just business rates: council tax, fees and charges and grants are also essential parts of the mix.

Council tax accounts for 15% of a local authority's income on average, a significant portion. Although conceived as a locally-controlled mechanism, it has been effectively capped at a 2% annual increase since 2013 meaning that local authorities have limited control over this area of their income. Pushing for the removal of the cap would give some breathing room, but, as with business rates, council tax has its downsides and local authorities have limited control over the system itself (eg. revaluation frequency, reliefs and exemptions).

With council tax intake constrained and public sector spending cuts biting, many councils have turned to the only other fundraising tool they have real control over: fees and charges. Most councils have made heavy use of these to raise extra money in straitened times, increasing fees for services like parking, planning and waste. However this can often prove unpopular with residents who have come to expect certain things from their council and wonder where their council tax is going. Some councils also find that introducing new or higher charges leads to perverse incentives and negative outcomes: higher waste collection costs may lead to an increase in flytipping, and high parking charges may reduce high street footfall and therefore damage local retailers.

Grants from central government have been a key feature of the local government ecosystem for some time, for specific areas like education, public health and house-building, as well as the general Revenue Support Grant (RSG) distributed according to need. As it stands, the RSG is due to be phased out by 2020 (to be replaced by locally retained business rates as discussed above) but as yet there have been no changes announced to the other grants.

It is worth considering whether these mechanisms are working, how they could be improved and whether any new local levers could or should be introduced.

This requires a bigger conversation about governance, accountability and expectations – the choices we make about funding have a direct impact on people’s quality of life and their ability to engage with the political structures that affect them. An under-scrutinised aspect of 100% Business Rate Retention is the increased influence it will likely give to local businesses as councils become more reliant on them for their funding. Although not necessarily a bad thing in and of itself, we must ensure that adequate checks are put in place to preserve the voting power of citizens.

This is not a sustainable situation, particularly if councils are going to be assuming new responsibilities. When combined with business rates income (a volatile source) councils will have very few levers at their disposal to balance the books each year. If councils are expected to take more of a role in local growth and to become financially self-sufficient, they must have more freedom to influence their income. It would be worth considering a wider range of powers, such as local VAT, local income tax or tourism tax, in order to make financial devolution work.

What do we need from government?

With this in mind, it is worth asking what local government should look like in order to be able to fulfil its current (and future) roles. How can we build trust between different levels of government? What really is the fairest way to pay for services? How do we pay for adult social care specifically? What new powers, like local VAT, local income tax or tourism tax, could be introduced?

And most importantly, how can we reinvigorate this debate and shift the dial?

We call on government to rebuild trust with local government and support the sector in pursuing the right approach for their citizens. We ask that the government:

1. Urgently provides clarity about how local authorities will be funded in immediate future;

2. Opens a meaningful dialogue with local government to discuss their concerns and ideas, as the first step to rebuilding mutual trust; and

3. Develops and pursues a meaningful and holistic strategy for further devolution in consultation with the sector.

LGiU is already making headway shaping the future of this policy area through our Future of Local Government Network. We have been touring the country hearing from council leaders, chief executives and policy-makers about the major issues of the day: finance, sovereignty, democracy and leadership. The final report, due to be published next month, will contain a commitment to set up a Local Finance Commission to start mapping the path ahead. Our recent work with the Institute of Fiscal Studies, The Local Vantage, also feeds into the discussion by providing data-driven insights on the current context.

Whatever the crisis, local government keeps the country running, but it cannot continue to do this without a sensible and sustainable funding settlement. Now more than ever, it is essential that councils' views on their own funding are taken seriously and that we engage in a wider debate about how and why we pay for local services. Our Local Finance Commission will start this debate. 

For more information, sign up to our finance updates.

Read the first essay in this series, Lessons from the Greater Manchester experiment.