A long term economic plan for local government?
Jessica Studdert, Deputy Director, NLGN, 25 November, 2015

So now we know. Local government must prepare for Revenue Support Grant (RSG) to more than halve from £11.5bn this year to £5.4bn by the end of the decade.

The Chancellor’s plans are complex. While RSG will be phased out, Osborne claims that overall local spending will actually rise in cash terms as a result of growing revenue from the Council Tax and business rates. There is undoubtedly some dodgy maths at work here – for instance, the Chancellor is assuming that every council will raise Council Tax by nearly 4% a year, a questionable assumption and certainly not a tax increase he himself would happily pursue.

That 4 per cent is now possible because of Osborne’s plan for a new 2 per cent social care levy, added to the current increase threshold of up to 2 per cent. It is one of several moves designed to prop up creaking social care departments who are currently faced with heavy costs from the new national living wage. Health and social care integration will be stepped up and councils will receive a further £1.5bn through the Better Care Fund, presumably from health budgets. The Spending Review drops heavy hints that county councils might get a bigger slice of business rates and new homes bonus to plug funding gaps.

Local government will now be allowed to spend receipts from fixed asset sales on revenue costs of reform projects, although interestingly this excludes receipts from ‘Right to Buy’ which will still pour into the Exchequer. The detail on how this will work will be part of the December local government settlement but the idea that councils should use the one-off costs of asset sales to plug revenue gaps is not sustainable.

With so much new localised revenue generated from the sale of assets or value of houses, the distributional consequences will be more serious for areas with lower value properties. One council we spoke to expects to make just £500,000 from a 2 per cent council tax increase. On that basis, it will take four years to recoup the costs of the wage hike alone. Even if the Council Tax increases really do generate £2bn, this is less than half the £4.3bn funding gap that the LGA and ADASS have identified.

There are also new responsibilities which will soak up a good share of retained business rates. The government will consult on exactly what, but it seems likely that councils will have to meet an increasing share of the costs of public health and housing benefit administration. The question for local government is how far these new responsibilities create extra cost pressures, and whether they will – or indeed can – be balanced by sufficient new flexibilities.

Hypothecation was once seen as anathema in the Treasury, and centrally, that’s still largely true. But it is increasingly not the case for local government. Rises in business rates in some areas are tied to infrastructure investment, and council tax increases are tied to social care spend. This is hardly the era of devolved freedom to which George Osborne recommitted himself in today’s speech. It is hard to argue against the principle of raising investment in each of these areas, but the sum total is a worrying mission creep of prescriptive strings attached to new freedoms. A local tax that is alternatively frozen then hiked by 4 per cent, both as a result of central direction, is in danger of not being a local tax at all.

The ultimate message of the Spending Review for local government is simple: the age of significant redistribution and funding for services based on need is fully over. If you want more money, you need to generate it from your local economy. But as long as that freedom is trammelled by a chancellor who still exerts huge power over local spending, localities will not be able meet their full potential.