The £3 Billion Pound Question

Jason Lowther

The Institute for Fiscal Studies’ latest review of English council finances documents why so many chief executives and treasurers have been having sleepless nights since “whatever it takes to tackle Covid” transformed into “as little as we can get away with giving you”.

On Wilkins Micawber’s “income” side, Covid has hit councils’ commercial activities, notably around retail rents, as well as fees for facilities such as leisure centres, and revenue from local taxes.   On the expenditure side, councils are seeing persistent cost increases.  As Micawber predicted: “result misery”.

In social care alone, expenditure on the care of older people will need to increase substantially and quickly.  Adult social care has faced a combination of pressures arising from demographic change and increased costs, rising need and demand, and short-term funding settlements. 

The IFS recognises the huge uncertainties involved in predicting financial and economic issues at present, addressing this by analysing a range of scenarios.

The bottom line across all council services is a £3bn+ shortfall in 2020–21, with the IFS concluding this may well be an optimistic estimate, and a middle scenario projecting a gap of over £3bn a year by 2024-25.  Not surprisingly they conclude that “without additional funding and/or flexibility over council tax rates, it is highly likely that councils will have insufficient revenues to keep pace with rising spending needs”.

What to do about this?  Aside from yet more austerity, the IFS identifies changing the rules on council tax rises (which would increase inequalities between rich and poor areas), increasing government grants, or giving councils additional tax powers such as new local taxes.

Austerity, the sustained and widespread cuts to government budgets which characterised Britain’s public policy from 2010, has already shrunk the capacity of the local state, increasing inequality between local governments and exacerbating territorial injustice[ii].

Greater local freedom on taxation is well overdue in the UK, where a larger proportion of local government spending is financed through grants from central government, and much less use is made of local and regional taxation than in almost all other European countries[iii]

Although the body of existing academic evidence about the impact of devolving fiscal powers is inconclusive[iv], comparative research on how municipal governments function in a number of major international cities demonstrates that British cities have very low levels of fiscal autonomy[v] and lower productivity than these cities.  There are also positive effects on economic outcomes when powers are held at the appropriate level and when local authorities are incentivised to create pro-growth planning regimes[vi] 

It’s also worth noticing again that much local government funding is still distributed through competitions which place considerable pressures upon local authorities and partners[vii], and result in wasted effort and ineffective use of resources.  And, whilst councils and other public bodies can share resources and pool funds to deliver joint outcomes more effectively and efficiently, there are still legal, cultural, governance and other barriers to this collaboration. 

In the short term, government should cull competitive funding and address the barriers to resource sharing.  They must plug the £3bn+ funding gaps over this and the next few years.  And in the medium term much more local freedom on taxation and autonomy are needed to give local government a sustainable future.

Jason Lowther, Director – Institute for Local Government Studies


[i] Ogden, K. et al, 2020, COVID-19 and English council funding: what is the medium-term outlook?, Institute for Fiscal Studies

[ii] Gray, M. and Barford, A., 2018. The depths of the cuts: the uneven geography of local government austerity. Cambridge Journal of Regions, Economy and Society11(3), pp.541-563.

[iii] Loughlin, J. and Martin, S., 2003. Options for Reforming Local Government Funding to Increase Local Streams of Funding: International Comparisons. Lyons Inquiry into Local Government Funding.

[iv] London Finance Commission, 2013. Raising the capital: The report of the London Finance Commission. London, the Commission.

[v] Slack, E., 2016. International Comparison of Global City Financing: A Report to the London Finance Commission. Institute on Municipal Finance and Governance Munk School of Global Affairs. University of Toronto.

[vi] Cheshire, P.C. and Hilber, C.A., 2008. Office space supply restrictions in Britain: the political economy of market revenge. The Economic Journal118(529), pp.F185-F221.

[vii] Loader, K., 2002. What price competition? The management of competitive funding in UK local government. International Journal of Public Sector Management.

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