28 September 2021

Even Whitehall doesn’t understand how local government finance works


‘Fog everywhere,’ wrote Dickens in Bleak House. ‘Fog up the river, where it flows among green aits and meadows; fog down the river, where it rolls defiled among the tiers of shipping and the waterside pollutions of a great (and dirty) city. Fog on the Essex marshes, fog on the Kentish heights.’ Yes, I am talking about local government finance. 

You don’t have to be a conspiracy theorist to suspect that the methods of allocating central government funding to local authorities, including the Revenue Support Grant, the Inter-Authority Transfers, the Local Services Support Grant, the Lower Tiers Services Grant and the Localised Council Tax Support Administration Subsidy Grant, are deliberately impenetrable so that injustices can not be exposed. 

I suspect the truth is even worse than that. Rather than an elite of officials guarding the secret formula nobody really understands, different people feed in lots of figures into a computer then, after a long whirring noise, the machine will spew out the results. Then every council in the country will complain that it has been allocated much less money than it deserves. 

A ‘fair funding’ review has been promised with much speculation about winners and losers and floors and ceilings. But the plans have been delayed. It is doubtful that whatever emerges will result in the grievances being much diminished. 

Yet some bold changes could help the Government achieve two of its main objectives – ‘levelling up’ some of the poorer parts of the country and increasing the housing supply. 

The computer at the Department for Levelling Up, Housing and Communities (as we must learn to call it) may baffle us with its calculations, but if we look at the amount of money that ends up going to different councils we can pick up some clues. The population level must be the starting point. Then there will be the consideration that a rural area will have more roads to maintain. But deprivation is also a huge factor. That is understandable. The poor are going to be more in need of local services than the rich. The problem is the perverse incentive to councils that maintaining high levels of deprivation will keep the cash flowing into the town halls. 

The most recent English Indices of Deprivation was produced in 2019. It divides us all into ‘Lower Layer Super Output Areas’ or LSOAs. These are small neighbourhoods with around 1,500 people each. Altogether there are 32,844 of them. They are ranked from the least deprived to the 32,844th most deprived. 

The local authority league table of deprivation is based on how much of the population comes from the poorest tenth of LSOAs. Middlesbrough is the poorest with 48.8% of its neighbourhoods in the poorest 10% nationally. That is unchanged on 2015 when it was last measured. Liverpool is just behind, and has got worse since last time. Nottingham is on 30.8% – still very high but down 2.7%t on four years earlier. 

But the measure is very complicated. There are 39 separate indicators. The ‘conceptual framework’ is flawed as it relies on the approach of the sociologist Peter Townsend of ‘relative poverty’ rather than absolute poverty.

Another problem is that the same local authority could have a sharp contrast in its fortunes. From walking distance of my house in Fulham I suspect I could get to some of the richest LSOAs in the country and some of the poorest. 

A better approach would be to just measure the number of Universal Credit recipients in each local authority. Then each year include a Deprivation Reduction Grant for those areas where the number had fallen – the bigger the fall the greater the funding. 

The other incentive could be an increase in the New Homes Bonus. That rewards local authorities according to the increase of the housing supply in their areas. It includes conversions and bringing empty derelict homes back into use as well as newly built homes. Councils already benefit from extra Council Tax revenue from more housing. But this gives a boost for six years for each home. The payments have grown to around £1 billion a year. I suggest it should be dramatically increased. But that the Section 106 and Community Infrastructure Levy payments, which come to around £7 billion a year, be scrapped. 

That would simplify the planning system which would particularly help smaller firms. The New Homes Bonus is not ring-fenced. But the Section 106 and CIL payments are incredibly fiddly. They cause delay and do little to win public support for development. 

Those changes encourage property developers to get on with building the homes we need and for councils to provide whatever infrastructure they felt was required. Fewer opportunities would be missed while lawyers haggled at meetings over viability assessments. 

Rather than extra development being imposed the councils could choose to keep it down to the minimum possible. But then they would miss out on the extra money. 

Some may be surprised that after the Council Tax, Business Rates and all the parking fees and assorted charges that local government still relies on, central government grants to pay for around a third of its spending. Let us assume that the total should not be changed. There should still be big changes with the breakdown. For example, the £3.7 billion given to local authorities for their Public Health budgets has been very ineffectively spent and should be scrapped. So should some of the plethora of other grants and schemes. 

But councils should know that where they have policies to encourage the creation of wealth and jobs and good quality housing they will be encouraged along that path. It will be clear to them that success will not be penalised. To put it mildly, that is by no means obvious from the current bewildering arrangements for our municipal budgets.

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Harry Phibbs is a freelance journalist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX