‘Big winners and losers’ will be created by local government funding reforms: IFS
The Institute for Fiscal Studies (IFS) has warned that proposed reforms to local government finance would create "big winners and losers", with some councils gaining and others facing significant cuts.
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Under the Government's plans, a new system for allocating funding between councils will be implemented from 2026-27, which will take account of new official assessments of councils' spending needs and their relative abilities to raise revenues themselves via council tax.
The Government plans - which are still being consulted upon - propose phasing updated allocations over three years, alongside providing funding floors for those councils due to see cash-terms reductions in funding.
In a report analysing the proposals, the IFS considered how the changes would impact different types of councils.
The independent research institute said there would be a "significant variation" across unitary, district and county councils in terms of impact, adding that the reforms would see funding reduced by a combined £2.1 billion for 186 councils, and increased by the same combined amount for 161 others.
According to the report, one in 10 councils would see a reduction in overall funding - including from council tax - of 14% or more, while another one in 10 would see an increase of 10% or more.
The report said that inner London boroughs would see the largest reduction in funding of nearly one-fifth (–19%) in the event that the reforms were introduced immediately without floors.
In particular, the IFS estimated that Camden, Hammersmith & Fulham, Kensington & Chelsea, Wandsworth and Westminster would see funding fall by over a quarter if the reforms were introduced immediately, and would all be on the lowest funding floor and so face a real-terms cut of 11–12% over the next three years even if they increased their council tax by the maximum allowed each year.
There would also be small reductions, on average, for shire districts (–3%) and fire authorities (–3%), and counties would see little change, the report said.
While there would be small increases of between 2 and 3%, on average, for outer London boroughs, metropolitan districts and unitary authorities.
Elsewhere, the report stated that, on average, councils in the most deprived 30% of areas would experience very similar changes in overall funding over the next three years to those in the middle 40% of areas.
This was "somewhat surprising" as the Government "highlighted deprivation as a factor it thinks leads to higher spending needs", the report added.
Responding to the report, the Chartered Institute of Public Finance and Accountancy (CIPFA) said it recognised the IFS's conclusion that the proposed reforms would better align funding with councils' assessed spending requirements, but also warned that the "scale of change involved will bring significant challenges".
CIPFA Director of Public Financial Management Iain Murray said: "CIPFA supports the direction of the government's proposed funding reforms and agrees with the IFS that aligning funding with spending needs is essential for long-term sustainability.
"But as the IFS report makes clear, the legacy of nearly two decades without reform means that adjustment will be painful for some authorities. A phased approach is prudent, but the Government must be prepared to go further in protecting councils at risk of service failure."
He said that change must be iterative to avoid stagnation, adding that regular updates to funding formulas, clear and consistent data and continued engagement with the sector "are all vital".
CIPFA also echoed the IFS's warning that reforming the funding formula is only part of the solution. Addressing cost pressures, redesigning services, and making better use of technology will be key to the future sustainability of local government, it argued.
Earlier this month the London Councils group said its analysis highlighted "serious issues within the proposals that risk dramatically underestimating levels of need for local services in London".
It called for "a more accurate approach to assessing local levels of need, which is key to ensuring resource matches need, sustaining hard-pressed local services, and restoring local government’s financial stability".
The consultation closes on 15 August.
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