Three reforms needed to tackle the crisis in local government finance

Birmingham Town Hall. Image: Very Quiet/Wikipedia Commons.

New research published in the Times on 8 February highlighted the scale of the funding crisis facing many councils across the country, with nine out of ten councils expected to be millions of pounds over budget by the end of the year. This followed the decision that week by Northamptonshire County Council to issue a Section 114 notice, meaning that it will introduce no new spending except on statutory services for vulnerable people – the first such notice issued in nearly 20 years.

In part, the situation in Northamptonshire is a result of poor financial management and political leadership. But this failure – and the struggles that other councils face – also reflects a decade of relentless tightening of local government finances. Many cities have seen cuts of nearly 50 per cent to central government funding since 2010, considerably more than the cuts that other parts of government have faced.

Moreover, it highlights the limitations of a local government funding system dependent on central government for income and for balancing the books, rather than being able to grow their income independently. If the only tool a city has to balance its budget is a knife, then all we’ll see are cuts.

Offering piecemeal bailouts or fiddling around the edges of the system, as the government has done in recent years, is not the answer. For cities to have stable finances and prosperous local economies, they need the tools to raise revenues with taxes that support sustainable economic growth.

So what should the government do to make the local government system stable and sustainable?

1. Revalue and devolve council tax

Regressive both nationally and locally, the failure to revalue council tax since 1992 means that it does not reflect the wide differences in economic gains seen across the country since then. Relative winners are homeowners in the South with more valuable homes and higher salaries, while those in the North where wages and assets have not grown so much carry a disproportionate load. For example, a £1m home in London is taxed to nearly the same amount as a £100k home in Sunderland. As a tax on home values, it fails on its terms.

To address this problem, there should be annual revaluations, and local authorities should have the power to introduce new bands and vary rates freely. This would support new development, and would enable local leaders to address budget issues by raising revenue rather than by simply cutting.


2. Reform the business rates system to make it more responsive to local economic conditions

This is the only tax of its kind in the UK where the amount raised is determined before the rate is decided. As such, even if the number of companies paying rates increases, the amount of business rates raised does not go up.

As our recent briefing on business rates devolution shows, one damaging effect of the current system is that it favours building more floor space in large developments – often in out of town areas – over improving and expanding the value of office space in city centres, where higher knowledge firms often seek to locate.

This has implications for economic disparities across the country. Cities in the North with an already large share of low skilled jobs are incentivised to attract more big new distribution sheds, when they really need to secure more high skilled jobs to grow their economies. Introducing annual revaluations would make the business rates system more reflective of increases in rents, not just increases in floor space. This would sharpen the financial incentives for cities to invest in and support the transport networks, high quality office space, and public realm that high-knowledge firms and workers are looking for.

3. Pooling finance at city region level

In UK cities, people live and work across multiple local authority boundaries. Over 50 per cent of people commute into a different local authority to work.

And different areas play different roles within cities, some more commercial (most often those in the centre) and others more residential (more likely the surrounding areas). This affects the levels of council tax and business rates raised across different authorities within the same city, and creates a divide over where business rates are raised and where the workers contributing to these rates use services.

Pooling at the city region level would help to improve the stability of local finances by diversifying and broadening the tax base. Doing so would also improve how big decisions are made within a city region about where to build commercial or residential space. Under the current system, councils within a city are understandably driven to boost their local tax base through new development. Pooling would help to secure higher absolute levels of council tax or business rates revenue across a city by putting it where it is most needed at that more representative scale.

In the current system, other councils may manage to avoid having to follow the example of Northamptonshire. But without this fundamental reform, we will see more cities cutting down on the activities they fund – which will be bad news for their economies, and for the people living in them.

Simon Jeffrey is a researcher and external affairs officer at the Centre for Cities, on whose blog this article first appeared.

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How China's growing cities are adapting to pressures on housing and transport

Shenzhen, southern China's major financial centre. (Photo by Daniel Berehulak/Getty Images)

In the last 40 years, the world’s most populous country has urbanised at a rate unprecedented in human history. China now has over 100 cities with populations greater than a million people, easily overshadowing the combined total of such cities in North America and Europe. 

That means urban policy in China is of increasing relevance to planning professionals around the world, and for many in Western nations there’s a lot to learn about the big-picture trends happening there, especially as local and national governments grapple with the coronavirus crisis. 

Can Chinese policymakers fully incorporate the hundreds of millions of rural-to-urban migrants living semi-legally in China’s cities into the economic boom that has transformed the lives of so many of their fellow citizens? The air quality in many major cities is still extremely poor, and lung cancer and other respiratory ailments are a persistent threat to health. Relatedly, now that car ownership is normalised among the urban middle classes, where are they going to put all these newly minted private automobiles?


Yan Song is the director of the University of North Carolina, Chapel Hill’s Program on Chinese Cities and a professor in the school’s celebrated urban planning department. She’s studied Chinese, American, and European cities for almost 20 years and I spoke with her about the issues above as well as changing attitudes towards cycling and displacement caused by urban renewal. This conversation has been edited for length and clarity.

American cities face very different challenges depending on which part of the country they are in. The Rust Belt struggles with vacancy, depopulation, and loss of tax base. In coastal cities housing affordability is a huge problem. How do the challenges of Chinese cities vary by region?

Generally speaking, the cities that are richer, usually on the eastern coastal line, are facing different challenges than cities in the western "hinterland." The cities that are at a more advantaged stage, where socio-economic development is pretty good, those cities are pretty much aware of the sustainability issue. They're keen on addressing things like green cities.

But the biggest challenge they face is housing affordability. Cities like Beijing, Shanghai, Shenzhen, and Hangzhou are trying to keep or attract young talent, but the housing prices are really, really high. The second challenge is equity. How do you provide equal, or at least fair, services to both the urban residents and the migrants who are living in the city, to alleviate some of the concerns around what the government is calling “social harmony?” 

Then the cities in the hinterland, typically they are resource economies. They are shrinking cities; they're trying to keep population. At the same time, they are addressing environmental issues, because they were overly relying on the natural endowments of their resources in the past decades, and now they're facing how to make the next stage of economic transition. That's the biggest divide in terms of regional challenges.

These urban centers rely on migrant workers for a lot of essential services, food preparation, driving, cleaning. But they live tenuous lives and don't have access to a lot of public services like education, health care, social insurance. Are Chinese policymakers trying to adopt a healthier relationship with this vast workforce?

The governments are making huge efforts in providing basic services to the migrants living in the city. They're relaxing restrictions for educational enrollment for migrants in the cities. In health care as well as the social security they are reforming the system to allow the free transfer of social benefits or credits across where they live and where they work [so they can be used in their rural hometown or the cities where they live and work]. 

In terms of health care, it's tough for the urban residents as well just because of the general shortage of the public health care system. So, it's tough for the urban residents and even tougher for the migrants. But the new policy agenda's strategists are aware of those disadvantages that urban migrants are facing in the cities and they're trying to fix the problem.

What about in terms of housing?

The rental market has been relaxed a lot in recent years to allow for more affordable accommodation of rural-to-urban migrants. Welfare housing, subsidised housing, unfortunately, skews to the urban residents. It's not opened up yet for the migrants. 

The rental market wasn't that active in previous years. But recently some policies allow for more flexible rental arrangements, allowing for shared rentals, making choices more available in the rental market. Before it was adopted, it’s prohibited to have, for example, three or more people sharing an apartment unit. Now that’s been relaxed in some cities, allowing for more migrant workers to share one unit to keep the rates down for them. You see a little bit more affordable rental units available in the market now.

I just read Thomas Campanella’s The Concrete Dragon, and he talks a lot about the scale of displacement in the 1990s and 2000s. Massive urban renewal projects where over 300,000 people in Beijing lost homes to Olympics-related development. Or Shanghai and Beijing each losing more homes in the ‘90s than were lost in all of America's urban renewal projects combined. It didn't sound like those displaced people had much of a voice in the political process. But that book was published in 2008.  How has policy changed since then, especially if people are more willing to engage in activism?

First of all, I want to make a justification for urban renewal in Chinese cities, which were developed mostly in the ‘50s and ‘60s. At the time, [in the 1990s] the conditions weren’t good and allowing for better standards of construction would inevitably have to displace some of the residents in older settlements. In my personal opinion, that wasn't something that could be done in an alternative way.  

Still, in the earlier days, the way of displacing people was really arbitrary, that's true. There wasn't much feedback gathered from the public or even from the people affected. In the name of the public interest, in the name of expanding a road, or expanding an urban center, that's just directed from the top down. 

Nowadays things are changing. The State Council realized they needed more inclusive urban development, they needed to have all the stakeholders heard in the process. In terms of how to process urban development, and sometimes displacement, the way that they are dealing with it now is more delicate and more inclusive.

Can you give me an example of what that looks like?

For example, [consider] hutong in Beijing, the alleyway houses, a typical lower-density [neighbourhood] that needs to be redeveloped. In the past, a notification was sent to the neighbours: “You need to be replaced. You need to be displaced, we need to develop.” That's it. 

Nowadays, they inform all different sorts of stakeholders. They could include artists' associations, nonprofits, grassroots organisations that represent the interests of the local residents. Then they [the citizens groups] could say what they really want to preserve. “This is what we think is really valuable” and that will be part of the inputs in the planning process. Some of the key elements could possibly be preserved. They  [the authorities] also talk about the social network, because they realized that when they displace people, the biggest loss is the social network that they have built in the original location. So, it's not only conserving some of the physical environment, but also trying to conserve some of the social network that people have.  


(STR/AFP via Getty Images)

Speaking of urban renewal, there was a big emphasis in the ‘90s and 2000s on highways. A lot of auto-oriented development in Beijing, following more of a Los Angeles than New York model. There's this quote I saw from Hong Kong architect Tao Ho, during the 1990s development of Pudong in Shanghai, warning against replicating “the tall buildings and car-oriented mentality of the West." 

In the ’90s or the first decade of the 21st century, most cities in China were still making mistakes. When I was a student, in the late '90s, I was translating for the American Planning Association. At the time, Beijing was still taking out the bike lanes and the planners from APA were telling them: “No, don't do that. Don't make that mistake." 

In the past decade, that's not occurring anymore. It has been happening [adding bike lanes] for a couple of years in Beijing, Shanghai, Shenzhen. More attention has been given to improving the service quality of green transportation, upgrades to buses, the bike lane system, and so on. 

As China got richer, bikes became a symbol of poverty and, like you said, urban planners began removing bike lanes. Cities like Nanjing and Shanghai considered banning bikes from the central city entirely. 

For a long time, bike lanes were abandoned and the road surface was more devoted to the car. But in the past few years this has been changing, more road space has been given to bus rapid transit and to bike lanes. The attitude giving precedence to the private car is giving way.

Another thing they are trying to do is behavioural change, teaching younger generations that biking is cool, creating a new set of values that's more sustainable. In some major cities, you see educational campaigns, posters around the cities, [saying] bicycling is really cool. 

A recent paper you worked on looked at air quality in Chinese cities and found they are still struggling. The paper cited a study suggesting “that Chinese cities face the worst air quality across different cities around [the] world based on an extensive research of 175 countries.” Your paper recommends transit-oriented development and significant green outdoor space. Is that something you see policymakers adopting?

Yes, definitely, although with regional variations still. The eastern and southern cities are seeing more policies toward transit-oriented development. They are adapting smart technology too. For example, Hangzhou, which is the model of smart cities, the tech tycoon Alibaba installed sensors on every single traffic signal there. Then they were using technology to change the light, so when they detect a higher volume of traffic, they streamline the green lights and the red light wouldn't stop the cars, so there are less carbon emissions at the intersections. They showed that there was a reduction of up to 15% emissions. 

What about in terms of parking policy? How are policymakers trying to deal with the influx of cars in these cities? Are there parking minimums like in many American cities?

I was visiting Hangzhou in December, their “Smart City” headquarters there. They were trying to use technology to let people know where there's parking, so they don't have to drive around, which increases carbon emissions. In other cities, like Shenzhen, they were increasing the parking fee in the downtown by 50 yuan, or seven US dollars an hour. That's pretty high in the context of Chinese cities. It was 10 or 20 yuan before. So, just increasing the parking cost in the downtown area so that you discourage people from driving.

What are you working on now?

My new research is still on air quality. We had a really cool collaboration with a counterpart of Google Street Map. In China, that’s Baidu StreetMap. We asked the company to install another sensor on their cars when they take pictures. We added a sensor for air quality. So, we will know at a street level what are the current emissions by geolocation, by time. That will be really cool when we have all that data. 

Jake Blumgart is a staff writer for CityMetric.