Local government on the brink

Duncan Bowie explains how eight years of an austerity straitjacket has pushed many councils to the verge of collapse. But does Labour have an effective alternative funding plan?

Who would want to be a councillor in the current climate? Almost every week we hear of councils that are struggling to fund core services and at risk of financial insolvency. First Northamptonshire, then Somerset and most recently East Sussex – all Conservative controlled – hit the headlines. BBC News recently focused on Hartlepool where the police service can no longer carry out its statutory functions to protect the citizens of the city due to the reduction in police numbers – or as the officer interviewed put it: ‘not enough cops’.

In March, the National Audit Office published a report on the ‘Financial sustainability of Local Authorities’. The report included some startling figures:

  •  49.1% real terms reduction in government funding for local authorities 2010/11 to 2017/8
  • 28.6% real terms reduction in local authorities spending power (government funding plus council tax) 2010/1 to 2017/8
  • 32.8% real terms reduction in local authority spending on non social care services 2010/11 to 2016/7
  • £901m  overspend on service budgets by local authorities in 2016/7
  • 66.2% of local authorities with social care responsibilities that drew down on their financial reserves in 2016/7

The report also projected that at this rate of spending, one in ten local authorities would run out of reserves within three years – that is, before the next general election. These reductions need to be seen in the context of increased population growth, especially in relation to elderly people who make significant demands on social care budgets. The figures above are national averages, and in many areas the cuts have been much greater.

The current government intends to reduce the main local government support grant to zero by 2020. Local authorities are therefore required to be self-financing, except where they are eligible for specific grants. Council Tax rises are capped at between 2% and 5% per annum (the government having raised the cap slightly to allow councils to raise further money for social care). Council tax on individual properties in England is based on values set in 1991, so are now 27 years out of date.  A revaluation was proposed in 2007 but not implemented. Where a property value has doubled or even trebled over the last 25 years, the owner will generally be paying a similar level of council tax to 25 years ago. This contrasts with Wales, where there was a revaluation in 2005, and Scotland, where a new local tax system has been recently introduced. The highest band (band H) in England relates to properties with a value in 1991 of £320,000 or more.  The average property value in London for properties on the market (new and second hand) as at January 2018 was £485,000 (the national average being £242,000; the figure for Westminster and Kensington and Chelsea is now £1.8 million).

The Labour Party has campaigned for the removal of caps imposed by central government on borrowing by individual local authorities and the Government has recently announced this reform. While this helps those local authorities that have the assets and income against which they can borrow, it is not in itself an answer to the current crisis of local government funding, as in order to borrow more, local authorities need the ability to pay back the funds borrowed with interest. Many councils have not used their pre-existing borrowing capacity as they do have the capacity to have the guaranteed income to fund repayments. Not only have local authorities had to dig into their reserves to fund current expenditure, many have had to sell off assets to fund either services or debt repayments. Newham Council, for example, is paying more to banks in interest payments than it receives in Council Tax income.

Council asset management tends to focus on immediate financial requirements rather than the longer-term strategic requirements and statutory functions of the authority. So public land and property is sold, often to the highest bidder, with little or no regard as to whether the land or property could serve some public purpose in the longer term. Land on which council homes could be built is sold to private developers, while in some cases council estates that are tenanted are demolished and tenants dispersed as the site becomes a more valuable asset for disposal if existing occupants are moved out.

“It is unclear what funding mechanisms Labour would introduce in relation to local government. Many of us remain unconvinced they understand the role of local government any more than Conservative ministers”
Council strategy becomes driven by the requirement to survive financially, and difficult decisions have to be made as to which policy objectives and services are sacrificed.  With the weakening of housing legislation, child care and adult care are the primary unavoidable statutory functions. It is not surprising that youth services, recreation services and libraries receive the harshest cuts, with housing services often becoming the next sacrifice. So, councils, irrespective of political control, are forced into difficult, and often unacceptable decisions, as many of not just the older but the new cohort of would-be progressive councillors are discovering to their dismay.

Is there any light at the end of the tunnel? Would a Labour government come to the rescue? The honest answer is that we cannot be certain. Although the Labour leadership seeks to reassure us that they will end austerity, ending austerity when in government is rather more difficult than campaigning against it when in opposition.

It’s unclear how Labour is intending to invest in public services, but I am even more unclear as to what Labour policy is for rebuilding and refunding local government, so far as that will still exist by the time we get to the next general election. That is of course assuming the next general election will lead to a majority Labour government.

My understanding from the speeches by Labour shadow ministers and Labour economic advisers at the recent Labour Assembly Against Austerity conference, is that the assumption is that a Labour government will lead to economic growth, and consequently increased tax revenue for Government, without there being any requirement for significant changes to the tax regime. This is a rather traditional Keynesian argument – that investment, and nationalisation of key utilities such as water and railways, will pay for itself. What I do not understand is how the election of a Labour government would itself lead to a growth in national GDP and growth in the private sector of a level to fund public sector investment and service delivery, although I would of course hope this was the case.

Furthermore, it is unclear what funding mechanisms Labour would introduce in relation to local government. Labour’s leadership seems somewhat centralist in its approach to economics. Many of us remain unconvinced they understand the role of local government any more than Conservative ministers.

The Labour Party is apparently carrying out a review of local government finance, but other than comments about some form of land tax being under consideration, there is as yet no published outcome. There are a number of key issues. Firstly, Labour must give a commitment to restore the main revenue support from central government, what used to be called rate support grant but is now known as ‘formula grant’, which by the time of the next general election will probably have disappeared altogether. Secondly, the cap on council tax increases must be removed and Labour, both nationally and locally, must be prepared to campaign for increases in local council tax where necessary to fund local services.

This should be in tandem with a reform of the council tax system, both to relate tax to current property values and to introduce much higher tax bands for the most highly valued property. Also welcome would be the replacement of stamp duty (currently paid to central government) by a tax on the capital gains arising from property ownership, with receipts divided between central and local government. This should be supported by much higher taxes on inheritance and transfer of property ownership between relatives either before or after the death of the property owner.

As well as raising revenue for Government, this would have the positive effect of introducing a level playing field for first time buyers, so that access to home ownership was no longer limited to the offspring of existing homeowners. We should also introduce a local tourist tax. At present, the 20 million tourists who pass through London each year make no direct contribution to the costs of the public services they use.

Without these reforms, local government will continue to be primarily a mechanism by which local councillors impose austerity on their constituents and take the blame for a situation that is not of their making. If Labour is to maintain any credibility locally and Labour councillors have any hope for the future, the Labour Party must announce now what are their solutions to the crisis in local government funding. This can no longer be put off if we are to end the practice of austerity rather than just talk about how awful it is.

Duncan Bowie

Duncan Bowie was a senior lecturer at University of Westminster. His most recent books are Radical Solutions to the Housing Supply Crisis (Policy Press) and a history of the Left in Oxford. He is Chartist Reviews Editor.