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An unsettling finance settlement?

Source: PSE Feb/March 2018

Piali Das Gupta, head of policy at Solace, looks over the final local government finance settlement and argues that it does not do enough to support struggling council services.

The fortnight before Christmas has become a rather anxious time for councils as we wait for the provisional local government finance settlement to be published. For those unfamiliar with the rites of council finance, the settlement sets out how much funding central government proposes to allocate to each local authority the following year.

Councils need to have this information in order to be able to set the next year’s budget, including the council tax, which by law has to be done by 10 March. The earlier we get the settlement, the more time councils have to consider proposals and consult with the public in light of their overall financial position. The closer we get to Christmas without the settlement being released, the more anxiety mounts.

This year, provisional settlement day came down to the wire: 19 December. Immediate reaction from the sector was a bit muted. There has not been much by way of unequivocally “good” news in the settlement since before 2010, but the decision to drop proposed changes to the New Homes Bonus was generally welcomed.

Settlement falls short

Broadly, there was relief that there appeared to be no surprises, although there was general concern that it fell far short of addressing the crisis facing public services. Solace president Jo Miller commented on the day that “without certainty, stability and flexibility for local government’s financial base, the public services that our communities rely on will continue to be facing a cliff edge, and public money will be spent without the ability to plan effectively for the long term.”

Most in the sector considered it a bit of a damp squib and wondered why it had taken so long to come out. Last month, we learned of one possible reason: the provisional settlement was wrong. 

The error resulted from the Valuation Office Agency (VOA) having updated data which factored into business rates calculations and, ultimately, how much money councils will receive. This new data was not reflected in the provisional settlement, but has been taken into account in the final figures, published on 6 February. As a result, almost half of all councils learned that they faced a funding shortfall with a month to go to finalise next year’s budgets.

Councils cannot be worse off next year

For most, the sums involved reportedly amount to less than 1% of their annual revenue budgets, which might not seem like very much but will likely mean further service cuts or a dip into reserves for those who have to make up a shortfall. 

Neither of these options is optimal, especially when they have to be done in an unplanned way and budget proposals have already been out to public consultation. Solace called for the government to ensure that no council’s final settlement for 2018-19 was lower than what was set out in December, but it appears that no relief will be forthcoming. 

There are undoubtedly serious questions to be asked, particularly how the VOA and Ministry of Housing, Communities and Local Government allowed this to happen. As plans progress to make local government almost entirely funded from business rates and council tax, it becomes even more worrying to think about how exposed we are when we have so little control over the design and operation of the tax mechanisms that will fund our services.

Councils have little say in setting business rates, apart from discretion to offer discounts, and are also hostage to the VOA’s capacity to process appeals from businesses in a timely manner. The rates, moreover, only apply to businesses that have a physical footprint, which does not reflect the way that the worlds of commerce and work are changing. 

Similarly, council tax is based on property values that are more than 25 years out of date, but councils are powerless to update them, while the secretary of state effectively sets the upper limit for any increases.

There may come a day when the December rite of local government finance settlement will become obsolete. That certainly seems to be the government’s intention. This latest blip is a timely but unsettling reminder that the notion of being “self-financing” is very different to being financially autonomous.

(Top image © roberthyrons)



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