The next government will have to fix the broken finance system

Posted on July 03, 2024

A frequent comment we receive when we survey our members is that financial planning is currently harder than it was during the period of austerity after 2010. This may sound surprising, but it is due to the unprecedented level of uncertainty local government currently faces.

There has been half a decade of single-year settlements with the funding system increasingly fragmented and complex. Reforms that were proposed but have subsequently been heavily delayed and are now way overdue. As one finance officer put it to us, the situation now is ‘like budgeting with a blindfold on’.

Given this, it was welcome to see the consensus across the manifestos of the major parties to return to multi-year settlements. Multi-year settlements allow for effective financial planning and monitoring and would be a crucial first step to a more stable system.

Given the upheaval of the last few years, multi-year settlements should be a minimum expectation and should come alongside serious reform of the whole system – ideally building a new fairer system from the ground up. There is not one part of the current system that is not due major reform – whether that be the regressive and out-of-date council tax regime or the fact that the formulae that underpin funding allocations contain decades-old data.

Another area that needs major reform is business rates, which is now an incredibly complex element of local government funding. Both Labour and Liberal Democrats propose scrapping business rates and replacing with an alternate system. In addition to claimed benefits to the High Street, this could be a good move for local government finance too.

Back in 2013, councils were allowed to begin to retain a portion of the local growth in business rates. A decade on, there is no evidence that this has met the aim at the time of driving and rewarding economic growth, while the distribution of growth has disproportionately gone to the areas that were already wealthy, resulting in a growing gap between affluent and more deprived areas. This has been made worse by the failure to ‘reset’ the system in 2020 as was originally promised.

In addition to the complex retention and ‘top-up and tariff’ systems, complexity has been exacerbated by the many reliefs that businesses have received, particularly related to the Covid pandemic, and recently the de-coupling of the small and standard business rating multipliers. I believe that it would be better if business rates were detached from the local government finance system.

This would allow central government to make changes to the system without worrying about the consequences for local government and end the flawed retention system. Instead, general grant funding, alongside council tax, would fund local government. Proposals to scrap business rates could be the opportunity to do this, something that would simplify local government finance and make it fairer.

Aside from potholes, the future of local government has not been discussed much during the campaign. While there were some important steps recognised in each of the manifestos, it feels like no party has yet grasped the big steps required to stabilise local government and deliver a sustainable funding system.

Until they do, the sector must continue to raise the vital importance of the services we provide and how central we can be to delivering a new government’s agenda.

Read the piece in the MJ, here.

Read coverage of our ask about business rates, here.