Local government finance settlement

Local government finance settlement does not go far enough to address growing financial pressures on councils

Photo by Sarah Agnew

Yesterday, the Department for Levelling Up, Housing and Communities (DLUHC) unveiled the local government finance settlement for 2022/23.

Local authorities will see an increase in core spending power of 4.1% in 2022/23, with £1.5bn of new grant funding. London boroughs will receive around £240m of this funding (London Councils, 2021). This is a significant cash increase, but it comes after a long-term squeeze on local government funding. Councils will continue to experience difficulties in the face of a challenging economic situation, a growing population and increasing demand for services.

Government funding for local authorities has reduced significantly over the last decade. From 2015/16 to 2021/22, settlement funding for the 12 central London boroughs decreased by £626m in real terms, a decline of 33% (Commons Library, 2021). Central London local authorities have seen larger cuts than the average for the country as a whole; Hackney, Tower Hamlets, Wandsworth and Westminster all saw per capita cuts of 25% and above between 2010/11 and 2018/19 (Centre for London, 2019).

Reductions in funding for local government, coupled with increases in demand for services, and a rapidly rising population and growing need for social care, have contributed to growing pressure on local government finances in central London. It is therefore very welcome that local authorities will see an increase in core spending power. However, national population growth means that local government funding will remain 2.2% lower per person in real terms than in 2015/16 (IFS, 2021).

The financial pressure on already tight local authority budgets have been exacerbated by the pandemic. London was hit hard by the economic impacts of the pandemic and continues to see a slower recovery than other areas. Local authorities have been at the forefront of local response to the pandemic, supporting residents and businesses through financial hardship and economic uncertainty. But this has heavily affected local authorities’ budgets. London Councils estimated boroughs face £400-£500m of lost tax income over the next two years (London Councils, 2021). With new restrictions in place and a surge in the Omicron variant, local authorities will continue to face increased costs, and reductions in local revenue, which will put further pressure on budgets.

It is also worth noting that the headline increase in spending power assumes that boroughs will raise council tax by the maximum level. Many boroughs will have to increase council tax in order to fund local services, yet we know that this will have a disproportionate impact on lower income families who are already suffering from increases in the cost of living.

Local authorities desperately need a long-term approach to funding which properly reflects local need if it is to play its part in supporting economic recovery and delivering on the government’s levelling up ambitions. The use of single-year settlements makes it more difficult for councils to make long-term financial decisions. Future funding allocations should be through multi-year settlements to provide certainty for the sector. This supports effective planning, meaning better use of public funding and better value for money.

Allocations for the financial settlement for 2022/23 were based on funding assessments from 2013/14 – since then, London and the UK have experienced significant demographic and economic changes. The government’s Fair Funding Review is an opportunity to bring the local government finance system up to date, ensuring that funding reflects need. It is therefore welcome to see the commitment in the settlement consultation to work closely with local government and other stakeholders to update data and look at the challenges facing the sector before consulting on potential changes. If levelling up is to be a reality, after a long period of pressure on local government funding, it is vital that no council loses out financially from the Fair Funding Review.

Government should also look to how it can support local government to diversify income streams. Central London local authorities support the introduction of an Online Sales Tax, as outlined in the Fundamental Review of Business Rates. This should be pursued as a hybrid approach alongside business rates, and it should include a form of local retention. This would not only help to level the playing field between bricks and mortar businesses but also ensure sufficient revenue for local government.

The latest local government finance settlement provides a degree of relief for local authorities after a long period of reductions on resources. But additional support and long-term funding reform is needed. We look forward to working with central government to make sure that the Fair Funding Review works for all local authorities.

Efa Gough is a Policy Officer at Central London Forward.

 Central London Forward’s paper ‘Reforming Local Government Finance’ a position paper identifying the areas of concern and recommendations for reform to the local government finance system is available here.