Poverty and Inequality

Proposed population-based council funding formula would hit deprived areas

Government proposals to assess local authorities’ spending needs based on population will only divert funding from councils serving deprived areas to those serving more affluent areas, according to an analysis from leading economists.

In its submission of evidence to the Ministry of Housing, Communities and Local Government’s (MHCLG) consultation on measuring the needs and resources of councils, the Institute for Fiscal Studies (IFS) has argued that the government’s justification for not accounting for deprivation in the new proposals does not hold up.

The government’s justification for the proposed population-based assessment of council spending needs is that differences in population statistically explains the vast majority of variation in councils’ spending. However, the IFS pointed out that population varies so much between councils that it is inevitable the population will explain the majority of councils’ overall spending.

Its research shows that moving to this population-based formula would hit councils in more urban areas (e.g. inner-city London, Manchester, or Birmingham) where deprivation is often more concentrated; and, compared to a system which accounts for deprivation, would also hit deprived county areas such as Cornwall and Lancashire. Other shire councils, especially in the south east and suburban London, would benefit.

It also argued that it is “unclear” why the government proposes to account for population growth when assessing spending needs, but not for assessing authorities’ capacity for raising revenue, which would mean fast-growing councils gain “twice over” through more money from central government and keeping extra tax revenues.

This means that councils with slower or declining populations would lose out, which the IFS says “does not appear sensible unless the government wants to reward and incentivise population growth and housing development – on top of existing schemes (such as the New Homes Bonus) already in place.”

David Phillips, associate director at the IFS, commented: “Many of the government’s proposals on assessing councils’ needs and revenue-raising capacities are eminently sensible. However, the statistical analysis it cites to justify not including deprivation in the funding formula for many key services does not stand up to full scrutiny.”

He added that it is still too early to say what the overall impact of the Fair Funding Review will be on different councils, but emphasised that if the government goes ahead with its proposed population-based formula for spending on services homelessness, public transport, and libraries, “our analysis suggests deprived councils will lose out.”

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