Is the Fair Funding Review asking the right questions?

The Fair Funding Review aims to develop an improved assessment of councils’ spending needs and revenue-raising capacities to inform a new system of funding local government – to be in place for April 2020.  But, with council finances at a cliff edge, there are doubts over whether the Review is asking the right questions.

This was the topic of discussion at the recent CIPFA round table ‘what prospect for Fair Funding for councils?’, where a mixed group examined the Institute for Fiscal Studies (IFS) latest research into the Fair Funding Review.

The Fair Funding Review takes the approach that a reliable cataloguing of need and assessment of the local tax base will enable a fair allocation of funding.   However, while allocating funding according to need (and local revenue-raising capacity)should make it easier for councils in different areas to provide comparable levels of services, it also reduces the incentives for councils to grow their own tax bases and tackle the drivers of demand. This is a tricky trade-off and decisions need to be made on how to strike the right balance.

So, to what extent should councils be allowed to keep revenues linked to local decisions or their ability to grow their business rate intake?  In PwC’s 2018 ‘Local State We’re In’, we explored the views of councils and residents on local revenue raising.  A third of councils (36%) agreed that the incentive for growth should have precedence but two thirds (64%) agreed that revenues should be largely redistributed to ensure that all areas can provide services to a reasonable standard.

The public has a mixed view too, with 26% agreeing that councils should be able to keep all of the revenue raised by local taxes regardless of need, 36% agreeing there should be a balance between being able to keep revenue while ensuring that every area had enough to meet their needs, 19% agreeing that local taxes should be allocated to whichever areas need them most, and 19% saying they just don’t know.

In any case, financial constraints abound. Funding is often ring-fenced (e.g. dedicated schools grant, Housing Revenue Account, etc) and Council Tax increases are effectively capped (via the requirement for referendum for more than modest increases) which hampers the ability to exploit relative strengths to focus spending on relative need.  This increases the tendency, when funds are reducing, to focus narrowly on in-year spending because there is no ability for wider re-prioritisation of funds.  Removing some of these constraints could be extremely powerful in some places.

However, there’s a problem here; the elephant in the room.  The Fair Funding Review is about changing the distribution of funding between councils rather than the overall sum of funding.  Put another way, it’s a win-lose process of dividing a funding pie.  But, and here’s the problem, dividing the pie is a distraction from the fact that the pie is dramatically reducing in size.

The likely changes in funding for individual councils via the Fair Funding Review, though not insignificant, are dwarfed by the constraints found across the increasingly fragmented landscape of local public services.  For example, delayed transfers of care, which have become a point of public focus, show how patient needs can be obstructed by bureaucratic boundaries and the varying incentives these can create.  Councils need to offer more care to clear beds in hospitals but doing so incurs costs for councils.  Some areas of the country do far better at this than others – suggesting that geographic differences in cross-organisational working might be a better indicator of care than funding.

We believe that structural change of councils alone is unlikely to deliver the improvements that are needed. A focus on place should be given the highest priority.  To really address fair funding, wider local public services would need to be included, for example, through place-based budgeting.

So, to avoid leaving local government divvying up the crumbs of a shrinking pie, could the Fair Funding Review perhaps produce some kind of transitional capacity to enable a resumption of early intervention and preventative activities, or support place-based budgeting?  Could some of the ring-fences or boundaries be addressed such that the root causes of high spending could be tackled to a greater extent, and thereby increase the sustainability of the lower funding regime.

Clearly, this isn’t easy.  The Fair Funding Review has been set a specific question to answer; how to slice the pie.  While the Review may not address the bigger questions around local government finance, it is at least shining a light on the complexity of ‘fairly’ assessing need and exposing the differing situations of authorities across the country. This should pave the way for the more fundamental overhaul of the funding of local public services that is needed.

Andy Theedom | Director
+44 (0) 7561 789087

@AndrewTheedom | Linkedin Profile


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