Making local government finance even more local

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A welcome change in recent years has been NHS voices speaking out for more funding for local government. Aside from the key question about how much funding is available, there are important developments afoot in local government about its distribution that merit understanding from NHS colleagues too. The outcome of these reforms will have real impact whether resources available in local areas match local need – getting this right or wrong matters for the local system’s ability to deliver on our collective ambitions for improving health and wellbeing and reducing inequalities. 

Although this is anything but simple, there are broadly two things happening at the same time in local government: completing the move to locally raised and retained revenue and changing how local ‘spending needs’ are determined. The Institute for Fiscal Studies has explained this in more detail but let’s briefly look at these in turn.

From 2020 the vast majority of local government spending will come from local business rates and local council tax, as councils will be able to retain 75 per cent of business rates (up from 50 per cent) through the Business Rates Retention Scheme. The idea is that the scheme will incentivise local government to focus on economic growth, as they retain 75 per cent of any growth in rates (and also have to absorb any downside risk). To manage the reality that different local authorities have different abilities to raise business rates, there will be ‘periodic resets’ to equalize funding – where money will be moved around between different local authorities to better match funding to need. The more frequent the reset, the lower the economic growth incentive, but distribution of funds will better match need. And obviously, if the period between the resets is longer, the opposite holds true. The longer the period, the greater the risk that resources for services that support wellbeing may not match need.


Second, there will be changes to how local needs are determined. The government has consulted on new ways to assess relative spending needs (to inform the periodic resets of the Business Rates Retention Scheme). For some services, including adult social care, these proposals look broadly sensible as they are based on small level, local data. However, for a wide range of universal services (think libraries, leisure centres and local parks), the proposals look more concerning. The suggestion that spending need is based on population numbers only and not levels of deprivation could see spending power shift from more deprived to less deprived areas, reducing some local areas’ ability to deliver good quality services that support wellbeing.

If we are this uncertain of the impact of deprivation on spend and need, removing it is risky to say the least.

So why does this matter? The changes to the spending needs formula risks shifting resources further away from areas with poor health and wellbeing outcomes, meaning that budgets for services that support these critical outcomes are further squeezed.

Whether deprivation drives differences in need for local government services (particularly for universal services) is not a straight forward question.  Is it reasonable to base need just on the numbers of people living in an area, or should it reflect some of the characteristics of that population? The Ministry of Housing, Communities and Local Government’s own analysis says that population alone accounted for 88.1 per cent of all variation in past expenditure, and that adding deprivation as an additional cost driver increased the proportion of all variation explained by 4 per cent. The University of Liverpool used an alternative approach to analysing differences in spend and found that 16 per cent of variation in local authority spending was explained by deprivation. The same team reran their analysis using 2009/2010 spending figures and found that 40 per cent of local authority spending variation could be explained by deprivation. If deprivation only accounts for 4 per cent of the difference in spend you can see why it may be reasonable to exclude it. But if it accounts for 40 per cent of the difference, it really would not be acceptable to remove it from consideration. If we are this uncertain of the impact of deprivation on spend and need, removing it is risky to say the least.

Understanding the combined implication of these two changes is hard. The Ministry of Housing, Communities and Local Government has consulted on different aspects of the changes, but we have yet to see anything that analyses the combined impact in full. This feels quite different from the transparency of NHS allocations – based on advice by an independent body and where clinical commissioning group-level impact assessments are published, with a clear pace of change policy that dampens big swings.

How the financial flows do or don’t support the money getting to where the need is greatest is just as big a question.

Often, the health and care sector’s interest in local government funding can be limited to important but narrow questions relating to the public health grant (Will it stay ringfenced? How large will it be?), or the various extra pots of money given to social care (Will the Better Care Fund continue?). With potential swings in resource allocation away from need, that narrow focus may well miss the point. When it comes to local government funding, the quantum is only part of the story. How the financial flows do or don’t support the money getting to where the need is greatest is just as big a question. It can be the difference between local areas that can deliver good social care services, support health improvement and help reduce or divert more acute demand for health services. If we are serious about the ambitions of improved heath, this matters to us all.

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