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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