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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Treating towns as bastions of Brexit ignores the reasons for the referendum result – and how to address them

Newcastle: not all cities are booming. Image: Getty.

The EU Referendum result has often been characterised as a revolt of Britain’s “left-behind” towns and rural areas against the “metropolitan elite”. But this view diverts attention from the underlying issues which drove the Brexit vote – and ironically has diverted policy attention away from addressing them too.

It’s true that a number of big urban authorities, led by London, voted to stay. And overall people living in cities were less likely to vote leave than towns. Setting aside Scottish cities and towns, which both voted very strongly for remain, Leave polled 51 per cent of the vote in English and Welsh cities, compared to 56 per cent in local authorities that include towns. (Consistent data isn’t available below local authority level.)

Yet there is a lot of variation underlying this average across towns. In Boston, 75 per cent voted Leave, and in Hartlepool and Grimsby it was 70 per cent. But at the other end of the scale, there were a number of towns that voted to stay. For example, Leave polled at 49 per cent in Horsham and Harrogate, and 46 per cent in Windsor and Hitchin. In places such as Winchester, Leamington Spa and Bath, the Leave voted amounted to less than 42 per cent of the vote.

What drives this variation across towns? Data from the Centre for Cities’ recent report Talk of the Town shows economic outcomes were the biggest factor – with towns that voted Remain also having stronger economies.

For a start, pro-Remain towns generally have smaller shares of people who were either unemployed or claiming long-term benefit. (This is based on 2011 data, the latest available.)

Towns which voted Remain also had a higher share of jobs in high-skilled exporting businesses – an indication of how successful they have been at attracting and retaining high-paid job opportunities.

And both measures will have been influenced by the skills of the residents in each town: the higher the share of residents with a degree, the stronger the Remain vote.

So the Brexit vote was reflective of the varying economic outcomes for people in different parts of the country. Places which have responded well to changes in the national economy voted to Remain in the EU, and those that have been ‘left behind’ – be they towns or cities – were more likely to have voted to Leave.

This sends a clear message to politicians about the need to improve the economic outcomes of the people that live in these towns and cities. But the irony is that the fallout from the Brexit has left no room for domestic policy, and little progress has been made on addressing the problem that, in part, is likely to have been responsible for the referendum outcome in the first place.

Indeed, politicians of all stripes have seemed more concerned about jostling for position within their parties, than setting out ideas for domestic policy agenda. Most worryingly, progress on devolution – a crucial way of giving areas a greater political voice – has stalled.


There was talk earlier this year of Theresa May relaunching her premiership next summer focusing on domestic policy. One of her biggest concerns should be that so many cities perform below the national average on a range of measures, and so do not make the contribution that they should to the national economy.

But addressing this problem wouldn’t ignore towns – quite the opposite. What Talk of the Town shows is that the underperformance of a number of cities is bad not just for their residents or the national economy, but also for the residents in surrounding towns too. A poorly performing neighbouring city limits both the job opportunities open to its residents and impacts on nearby towns’ ability to attract-in business investment and create higher paid jobs.

This isn’t the only factor – as the last chart above suggests, addressing poor skills should be central to any serious domestic policy agenda. But place has an influence on economic outcomes for people too, and policy needs recognise that different places play different roles. It also needs to reflect the importance of the relationships between places to improve the access that people across the country have to job opportunities and higher wages.

The Brexit vote didn’t result from a split between cities and towns. And if we are to address the reasons for it, we need to better understand the relationship between them, rather than seeing them as opposing entities.

Paul Swinney is head of policy & research at the Centre for Cities, on whose blog this article first appeared.

Read the Centre’s Talk of the Town report to find out more about the relationship between cities and towns, and what this means for policy.