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London councils to be hit hardest by ‘perverse and unfair’ funding formula

Council funding should depend on how much councils would raise if they all set the same council tax rate instead of determining a formula based on recent spending patterns—which would only reinforce inherent disparities across the country, the Institute for Fiscal Studies (IFS) has argued.

In a pair of reports published today, the organisation argued that the government’s Fair Funding Review for councils could hit inner London boroughs such as Westminster the hardest—because they currently set lower tax rates despite having higher spending needs than other local authority areas in the country.

Westminster, for example, has the lowest council tax rate of the Band D in England—of just £415—but has high assessed spending needs.

The review will therefore make councils who set low tax rates bear more of the cost themselves, as well as lead to lower spending needs estimates for authorities which currently have the highest needs.

Tom Harris, research officer at the IFS, explained: “Historically, allocations have been based on previous spending patterns. Funding for more urban and deprived areas has been cut most in recent years. So any analysis using current patterns of spending will lead to a funding formula which does less to redistribute to poorer areas than would an analysis based on spending patterns a decade ago.

“Empirical analysis of spending patterns is useful, but it cannot provide a set of objective figures for what different councils ‘need to spend.’ In the end this is a political judgment.”

The IFS said Whitehall should instead completely change the way council tax revenues are treated: instead of linking funding to what council tax revenues happened to be in the mid-2010s, it should actually depend on how much local authorities would raise if they all set the same tax rate. Those setting higher or lower rates would therefore retain any extra money or bear any cost in full.

Cllr Paul Carter, chairman of the County Councils Network (CCN), argued that the IFS reports support his organisation’s claims that the fact that some inner London councils can charge residents half the amount of tax compared to the average shire county is “perverse and unfair.”

“As the report suggests, is it unfair to ask residents of other areas—predominantly counties—to effectively subsidise the service provision of London boroughs who have not raised council tax due to generous funding streams,” said Carter.

“It is crucial that the fair funding review deals with these issues. I hope the government is brave and backs the report’s conclusion to use notional rather than actual council tax rates in determining funding allocations.”

The chairman said CCN is encouraged by the direction of the review to date, but the government must ensure it delivers “real fairness” for counties, especially by recognising the demand-led pressures they face.

Neil Amin-Smith, research economist at the IFS, said the institute’s suggested method of funding local government would mean that while councils with low tax rates would lose as they have to bear the costs themselves, “the flipside is that councils with higher tax rates, including many county areas, would gain as they could keep the extra revenue to spend on better local services.”


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