Kate Hollern: Local government funding in desperate need of reform

Last week, the Commons debated the 2024-25 Local Government Finance Settlement.

Over the last 14 years, councils have been subjected to significant funding cuts, with councils in England receiving a real terms cut in their core spending power of 18.9% since 2010/11 compared to 2024/25.

2024/25 is also the sixth consecutive one-year settlement. Single-year settlements do not provide adequate certainty or stability. Multi-year funding settlements, on the other hand, would allow councils the ability to plan well ahead.

It is no coincidence, therefore, that there were more Section 114 notices issued last year than in the previous 30 years combined. Councils issue a Section 114 notice when their forecast income is unable to meet their forecast expenditure. In other words, when they run out of cash. A Section 114 inevitably means both cuts to services and big increases in council tax – as recently announced by Birmingham and Nottingham City Councils.

A Local Government Association survey carried out in December 2023 found that, before extra money was announced, one in five council leaders and chief executives in England thought it was very or fairly likely that their chief finance officer would need to issue a Section 114 notice either this year or next. Additionally, the survey found that half were not confident that they would have enough funding to fulfil their legal duties – including the delivery of statutory services – in the year 2024/25.

Fortunately, as things stand, Blackburn with Darwen Council is not in this position. This is in spite of the fact that Blackburn with Darwen (BwD) is top of SIGOMA’s (Special Interest Group of Municipal Authorities) list of councils for the level of funding reduction experienced since 2010. BwD Council has seen a real terms cut of £73m (29.4%) since 2010/11. This equates to a staggering £1,165 per household.

This is in part due to the fact that the last 14 years has seen a move away from providing local government funding based on need, toward one based on local tax-raising ability.

Councils have been hollowed out and are now being told that the only solution is to raise council tax more and more. But council tax rises should not be the solution to the long-term pressures faced by councils.

Due to significant variations in banding distribution and local tax bases, some areas are able to raise much more council tax than others. Essentially, the places with the most valuable houses (and in turn fewest low-income families) generate the most council tax income, whereas areas with higher numbers of low value Band A properties (and in turn the most families on low income) generate the least council tax income.

For example, Wokingham is the least deprived upper-tier council in England, but generates the most from an increase in council tax. With a 5% increase in council tax, Wokingham raises £130 per household. In contrast, BwD Council raises just £62 per household from a 5% increase, proving that the poorest and most deprived areas continue to lose out. The system is unfair and unequal.

Injustice in local government funding is also evident in the 84% reduction in the needs-based Services Grant. Whilst the biggest financial pressure for councils is currently demand-led social care pressures, funding increased for the Funding Guarantee and Rural Services Delivery Grant.

As a largely urban borough, BwD Council saw a reduction in the services grant of £1.5m and received £0 from the Funding Guarantee or Rural Services Delivery Grant. The provision of additional grants benefits the wealthiest areas, whilst deprived areas receive no additional support.

The £600m announced in the 2024/25 Local Government Finance Settlement was the latest sticking plaster on a plethora of issues. To prevent further Section 114s being issued, we must see urgent reform over the short, medium, and long term to stabilise this deeply imbalanced system.

The Levelling Up, Housing and Communities Select Committee, of which I am a member, has recently completed two separate inquiries into local government funding.

The inquiry into Financial Reporting and Audit in Local Authorities examined the role of audit in local accountability and democracy and the extent to which accounts provide a clear picture of the financial sustainability and resilience of a local authority. The Committee’s report found that the current local audit system is in a state of unacceptable crisis which requires significant and urgent attention.

It found evidence of an extensive backlog of incomplete audits and unaudited accounts, some of them many years out of date. Similarly, the committee’s report from its inquiry into Financial Distress in Local Authorities found evidence of systemic underfunding of local councils in England and called on the next Government to reform council tax, and the wider funding system for local authorities. Ultimately, local government in its present form is unsustainable, with the thirty-year-old council tax model being totally unfit for purpose. Council tax valuations are based on property values in 1991/92 – before many existing houses were even built.

Local government funding is in desperate need of wholesale reform. Rather than councils being treated as a political scapegoat, central and local government should be genuine partners in power.