Economic development in the UK: Local authority funding is a crisis of our making

Nigel Wilcock is Executive Director of the Institute of Economic Development and argues that local authority funding is a crisis of our making

The UK is suffering from crisis fatigue. Every financial statement has been dialled up to maximum and there is no longer any sense of scale in the crises that are proclaimed from every rooftop. The Institute of Economic Development has absolutely no desire to add to this cacophony of noise, but we do want to carefully and persistently make the case for local authority financial arrangements to be addressed.

Historically, nobody was interested in local government funding. Local infrastructure, bin collections and other services were set aside for the analysts. Everything changed with austerity. Now largely forgotten, costs for social care were transferred to councils, support for council tax resident support schemes passed to local councils and at the same time, austerity was implemented enthusiastically at a local level.

Now, economic activity is being sucked out of communities, there is a huge deficit emerging in aspects such as social care and decisions about funding allocations have been delayed to the point where funding is forecast to cease. We should be worried about the invisible hand surreptitiously removing local resources – but the impact of public sector cuts on local economies has probably not been fully considered.

We should be worried about the invisible hand surreptitiously removing local resources

Back at the time of the financial crisis, postmanufacturing communities could already be considered as economies slightly dislocated from a new knowledge-driven economy. These communities needed help to transition to new skills needs, infrastructure and a business growth agenda. Sticking plasters of higher levels of public sector employment in under-performing areas had been applied.

After the 2009 recession, the drivers of a shift to knowledge/digital economy remained in place and accelerated; public sector expenditure declined and impacted on local employment, but aside from employment reductions, the diminishing local authority budgets quietly sucked huge amounts of local expenditure from local supply chains and the associated multiplier effect. The Local Government Association suggests that the effect of austerity has stripped ever-increasing amounts of cash from local economies and this has increased year-on-year to £16 billion a year from 2009 levels.

the EFFect of austerity has stripped ever-increasing amounts of cash from local economies

At a macro level during the recession, commentators stressed about a Keynesian deflationary. This was largely avoided by less severe central government cuts in London and the sheer momentum of the London economy. At a local geographic level, the same Keynesian deflationary effect has been hardly discussed – but in retrospect, if 60% of local authority spending is effectively removed, if regional quangos are abolished, if wider public sector employment is reduced in the regions – but nothing is done to address the change – it is hardly surprising that communities have been left behind and bear no resemblance to the UK’s South Eastern communities.

The problem of leaving people behind is becoming an increasingly important agenda item in modern-day Britain. Political, social and economic reactions could be traced back to the start of the dislocation. The important aspect for the Institute of Economic Development is not what has happened, or even where fault may lie, but what opportunity is seized for the future. Local authorities are completely broken – and from 2020 the main central government grants that they receive will be phased out but the amount that they collectively keep from business rates will be raised to 75%.

The Local Government Association predicts that this will result in a local services funding gap of £7.8 billion by 2025. In response to the changes, local authorities have tried to support their economic areas through local intervention and in some cases to maintain their income stream through a wider portfolio investment strategy. In the absence of a longer-term strategy, who could blame them.

a local services funding gap of £7.8 billion by 2025.

On this basis, I am proposing four considered recommendations for the incoming government:

1. Recognise the community economies of the UK in funding decisions. Local authorities remain economic drivers in their own right.
2. Urgently provide local authorities with the funding re-allocation settlement that they have been promised as central government funding is phased out – this is essential for planning.
3. If central government funding is phased out of local authorities with a requirement on the local authorities to raise their own funding, national government should step aside from political decisions on the uniform business rate, business rate revaluations or other policies in this area.
4. Any funding solutions in the future should be considered as long-term and certain measures. The current, relatively small-scale grant funding competitions require a large amount of upfront invested effort with many areas losing out competitively on their bids. This could, therefore, be considered a waste of public sector resource.

This is not another voice crying wolf. Local authority cuts have been deeper than those implemented nationally.

In addition, local authorities have had more services to be delivered. For them, the changes keep on coming with more services to deliver and a likelihood of lower income. In fact, the income position of authorities in April 2020 is currently completely unknown with no published government funding allocation position.

This is critically important – probably most immediately for those who are reliant on local government providing a continuous and reliable social care position – but over the longer term for the local economies for whom local authorities create salaries and expenditure, drive economies and create confidence in investment and plan future local capital investment.

Nigel Wilcock is Executive Director of the Institute of Economic Development, the UK’s leading independent professional body representing economic development and regeneration practitioners working for local and regional communities.