Local government finance in England in the 2010s can be characterised by two major trends: large (albeit varying) cuts to council budgets; and a shift from centralised redistribution of funding towards a greater emphasis on fiscal incentives for revenue growth, most notably via the introduction and potential extension of the business rates retention scheme (BRRS).
It is in this context that this report, jointly written by researchers at the Institute for Fiscal Studies (IFS), the Local Government Information Unit (LGiU) and PwC, looks at how the views of councils’ decision-makers relate to the characteristics of the councils they represent or work for. In particular, we focus on views in two key areas: the quality of service provision; and the impact and design of the BRRS. Such an analysis allows us to examine whether perceptions of two key issues differ systematically between areas with different financial, political and socio-economic characteristics.
Almost nine-in-ten respondents say that service quality was maintained or improved in 2016–17, despite cuts. They are less optimistic looking ahead though. Just one-in-three are confident that cuts can be made without significant impacts on service quality or outcomes out to 2019–20, and one-in-six confident out to 2021–22.
Views on likely changes in service quality in 2016–17 and 2017–18 are unrelated to either a council’s level of revenues per capita or the scale of recent cuts to its revenues per capita. But there is a link between the type of council a respondent comes from and their views on service quality. In particular, concerns are significantly higher among respondents from councils with responsibility for adult social care than in shire district councils.
Larger falls in revenues are associated with less confidence about likely service quality in the medium term (2019–20). Both councils that experienced bigger falls in revenues between 2009–10 and 2016–17 and those with bigger (forecast) falls in revenues between 2016–17 and 2019–20 are more worried about future service quality than other councils. This may mean that while they have been able to mitigate pressures in recent years, by improving efficiency or dipping into reserves, they feel those options are no longer available.
Two-thirds of survey respondents say that it is impossible to work out whether their council has gained financially from the current BRRS. This may be because they are unsure what the funding system would otherwise have looked like. But given that better information may facilitate the desired incentive and accountability effects of the BRRS, publication of comparative data on councils’ performance under the BRRS could be worthwhile.
Respondents from councils that we estimate have relatively gained from the existing BRRS are more optimistic about the local impact of a 100% BRRS. Those from areas where recent economic growth is higher are also more optimistic. This is perhaps unsurprising, but this optimism may be misplaced: other research suggests there is in fact little relationship between economic growth and business rates revenue growth, at least during the period between 2010 and 2015.
Those expecting to gain from a 100% BRRS are also more likely to say that such a scheme would provide an incentive to councils more generally to promote economic growth. This could reflect differences in the general degree of optimism about the future among respondents. On the other hand, respondents could be conflating (local) financial impacts with the more general incentive effects: incentives to grow business rates revenues can still operate at the margin, even if overall a council is losing from the scheme.
Conservative-run councils and those with lower levels of spending need are more likely to favour prioritising financial incentives over redistribution in the design of the 100% scheme, than Labour-run councils and those with higher levels of spending need. This pattern is unsurprising and would seem to reflect the self-interest of councils in different circumstances. However, what matters for financial incentives is retention of future growth in revenues, not the existing stock of revenues. A greater focus on incentives – for example, by allowing areas to retain 100% of the growth for longer – would benefit high-revenues/low-needs areas over low-revenues/high-needs areas if there is further divergence in revenues and needs around the country. If instead there is convergence, needier areas may in fact benefit more from a system that prioritises financial incentives.
Taken together, the findings demonstrate and reflect some of the key challenges facing local and national government: substantial budget cuts, combined with rising demands for key services; and difficulties in developing a funding regime that can command widespread support across councils, when there are systematic differences in preferences over issues such as the appropriate roles of redistribution and financial incentives.
Further detail available in our joint press statement here.