The stench of unfinished business: how George Osborne’s financial reforms pose a threat to local government

A perfectly normal picture of George Osborne. Image: Getty.

The year is 2015. Local government minister Kris Hopkins is asked to explain the growing gaps between council’s spending powers. He answers by claiming the government has been fair to all parts of the country, concluding: “There is no magic money tree.”

Amidst all the unfortunate political developments of the last few years, the entry of this phrase into the popular lexicon is particularly depressing. Deployed liberally by commentators to whom sorcery, macroeconomics and botany are all patently perplexing, its prolific spread belies its analytical redundancy.

Where it does come into its own is as a tool of political doublethink – as can be seen in the matter of council expenditure. Hopkins raised the spectre of mystical foliage, knowing the formulation of local government finance left some authorities languishing under the weight of austerity (Knowsley was over £400 per head worse off at this point compared to 2011) while others had seen their spending power miraculously increase (like Elmbridge in Surrey). But it was wheeled out anyway: relieving the stragglers was unfeasible, anyone saying otherwise was a spendthrift.

Financial inequality between councils was a problem two years ago. Now disparities in their revenues are well into the realm of the ridiculous, and running further apart all the time. The question is: why?

Coalition cuts had been eating away at council budgets long before 2015. But, after the Conservatives gained a slim majority that year, the issue took on a new intensity. This can all be traced back to then-Chancellor George Osborne, two elections and (roughly) four jobs ago, when he came up with a bold scheme to overhaul local government funding.

His plan was to empower councils by allowing them to set and keep 100 per cent of business rates. The only downside to this sweet deal was that the Revenue Support Grant, worth £18bn, would be phased out over the following five years. It was all part of Osborne’s devolutionary bonanza against the backdrop of the fabled Northern Powerhouse.


A few problems stuck out with this scheme. In the short run, it would very likely cement existing inequalities between councils. Poor authorities rely the most on central grants, rich authorities contain wealthier businesses – thus the latter would rake in revenues while the former’s ebbed away.

To tackle this problem, a system of top ups and transfers remained in place to make up shortfalls for poorer councils. But these would be frozen, reducing their value over time and allowing already growing councils to tear ahead. In the longer run, the new setup could spark a race to the bottom as councils competitively cut rates in an effort to attract enterprise, piling further pressure on balance sheets.

Despite these drawbacks, it was a system that would have gone some way towards remedying the UK’s status as one of the OECD’s most centralised nations. But when Osborne eloped to the Evening Standard, he left a most unpleasant stench behind him: the stench of unfinished business.

By June of this year councils found themselves in limbo. Fiscal devolution was missing from the post-election Queen’s Speech (although there have been some pilot schemes), but cuts to central grants remained on schedule. Whether this is attributed to incompetence or pure evil, the result is the same: almost half of councils will receive no central funding by 2020, leading to a black hole estimated at £5.8bn by the Local Government Association.

On top of everything else, Brexit looms largest over particularly impoverished areas. Investment from European structural funds, worth around £8.4bn between 2014-20, have been thrown into doubt. The Treasury has promised to match all pre-Brexit investment agreements on the dubious condition that they are “in line with UK priorities”. Presumably these are only the most important and essential priorities, like shoving hundreds of millions at Conservative authorities to ease the pain of funding cuts as in 2016.

With the poorest councils most reliant on grants, inequality between authorities will deepen significantly without decisive action. Does Theresa May even know all this is going on? Between leaving the EU and trying not to get stabbed in the back, she has plenty of other worries occupying her time. Assuming she finds a spare moment and/or some political astuteness, how might she deal with the impending crisis?

One choice would be to get on with the reforms as they were initially intended: not ideal, perhaps, but at least allowing councils to keep their business rates would get the ball of devolution rolling again. This could be an important precursor to reversing unchecked inequality.

Empowering councils to borrow to deal with their most pressing problems (like housing) or promoting local finance initiatives like community banks would do more to put authorities on an even footing than piecemeal proposals like fiddling about with council taxes (which still disproportionately benefit wealthier areas).

Alternative inspiration could come from abroad. In Sweden, a redistribution grant kicks in whenever a local authority’s takings fall below a set threshold, partly funded by the highest earning areas. In France, large cities are in charge of their own transport provision, funded through specific business taxes. Firms’ contributions therefore give them a direct stake in infrastructural development. The Centre for Cities’ Beyond Business Rates report suggests different areas could use such powers to deal with local challenges – for example, housing in London and Oxford.

A more comprehensive solution would be out-and-out federalism. Highly unlikely, but potentially appealing: just imagine how much more time the Cabinet could spend on not sorting out Brexit if prosperity was a completely devolved matter. Giving regions complete control over their own affairs would at least mean the government could stop bothering with changes which manage to be both trifling and Kafkaesque.

None of these options are perfect. But all have a lot to recommend them, when the alternative is simply forgetting you were in the middle of overhauling local government funding, the Conservatives’ current strategy of choice.

The magic money tree is very much alive, contrary to Hopkins’ claims (and unlike his political career). It is burgeoning in Britain’s richest councils thanks to coalition cuts and two years of haphazard reform. These reforms need to be seriously reexamined, and soon – or the poorest areas will take the biggest hit.

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There isn’t a single national housing market – so we need multiple models of local regeneration, too

Rochdale. Image: Getty.

This week’s budget comes ten years after the 2007 financial crisis. The trigger for that crisis was a loss in confidence in mortgages for homes, with banks suddenly recognising the vulnerability of loans on their books.

In the last ten years, the UK’s cities and regions have followed very different paths. This week’s focus on housing affordability is welcome, but it will be a challenge for any chancellor in the coming decade to use national policy to help towns up and down the country. Local housing markets differ drastically. The new crop of city-region mayors are recognising this, as rents in parts of south Greater Manchester are on average double the rents in parts of the north of the city-region.

When it comes to buying a home, politicians are increasingly articulate about the consequences of inequity in our housing system. But we must recognise that, for 9m citizens who live in social rented homes, the prospects of improvements to properties, common areas and grounds are usually tied to wider projects to create new housing within existing estates – sometimes involving complete demolition and rebuilding.

While the Conservative governments of the 1980s shrank the scale of direct investment in building homes for social rent, the Labour governments from the late 1990s used a sustained period of growth in property prices to champion a new model: affordable housing was to be paid for by policies which required contributions to go to housing associations. Effectively, the funding for new affordable housing and refurbished social homes was part of the profit from market housing built next door, on the same turf; a large programme of government investment also brought millions of social rented homes up to a decent standard.

This cross-subsidy model was always flawed. Most fundamentally, it relies on rising property prices – which it is neither desirable nor realistic to expect. Building more social homes became dependent on ratcheting up prices and securing more private profit. In London, we are starting to see that model come apart at the seams.

The inevitable result has been that with long social housing waiting lists and rocketing market prices, new developments have too often ended up as segregated local communities, home to both the richest and the poorest. They may live side by side, but as the RSA concluded earlier this year, investment in the social infrastructure and community development to help neighbours integrate has too often been lacking. Several regeneration schemes that soldiered on through the downturn did so by building more private homes and fewer social rented homes than existed before, or by taking advantage of more generous legal definitions of what counts as ‘affordable housing’ – or both.

A rough guide to how house prices have changed since 2007: each hexagon is a constituency. You can explore the full version at ODI Leeds.

In most of England’s cities, the story does not appear to be heading for the dramatic crescendo high court showdowns that now haunt both developers and communities in the capital. In fact, for most social housing estates in most places outside London, national government should recognise that the whole story looks very different. As austerity measures have tightened budgets for providers of social housing, budgets to refurbish ageing homes are under pressure to do more with less. With an uncertain outlook for property prices, as well as ample brownfield and greenfield housing sites, estates in many northern towns are not a priority for private investors in property development.

In many towns and cities – across the North and the Midlands – the challenges of a poor quality built environment, a poor choice of homes in the local are, and entrenched deprivation remain serious. The recent reclassification of housing associations into the private sector doesn’t make investing in repairs and renewal more profitable. The bespoke ‘housing deals’ announced show that the government is willing to invest directly – but there is anxiety that devolution to combined authorities simply creates another organisation that needs to prioritise building new homes over the renewal of existing neighbourhoods.


In Rochdale, the RSA is working with local mutual housing society RBH to plan for physical, social and economic regeneration at the same time. Importantly, we are making the case – with input from the community of residents themselves – that significant investment in improving employment for residents might itself save the public purse enough money to pay for itself in the long-run.

Lots of services are already effective at helping people find work and start a job. But for those for whom job searching feels out of reach, we are learning from Rochdale Borough Council’s pioneering work that the journey to work can only come from trusting, personal relationships. We hear time and again about the demoralising effect of benefits sanctions and penalties. We are considering an alternative provision of welfare payments, as are other authorities in the UK. Importantly, residents are identifying clearly the particular new challenges created by new forms of modern employment and the type of work available locally: this is a town where JD Sports is hiring 1000 additional workers to fulfil Black Friday orders at its warehouse.

In neighbourhoods like Rochdale’s town centre, both national government and the new devolved city-region administration are considering an approach to neighbourhood change that works for both people and place together. Redevelopment of the built environment is recognised as just one aspect of improving people’s quality of life. Residents themselves will tell you quality jobs and community facilities are their priority. But without a wider range of housing choices and neighbourhood investment locally, success in supporting residents to achieve rising incomes will mean many residents are likely to leave places like Rochdale town centre altogether.

Meaningful change happen won’t happen without patience and trust: between agencies in the public sector, between tenants and landlords, and between citizens and the leaders of cities. This applies as much to our planning system as it does to our complex skills and employment system.

Trust builds slowly and erodes quickly. As with our other projects at the RSA, we are convinced that listening and engaging citizens will improve policy-making. Most of those involved in regeneration know this better than anyone. But at the national level we need to recognise that, just as the labour market and the housing market vary dramatically from place to place, there isn’t a single national story which represents how communities feel about local regeneration.

Jonathan Schifferes is interim Director, Public Services and Communities, at the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA).