This article will cover the premise of local governments, the sectors in which local authorities collect service provision revenue, the state of local government funding over the past decade, the burden the COVID-19 pandemic has had on local governments and the outlook for local government funding.
What do local governments do?
Local governments in the United Kingdom provide social care for children and adults, services such as libraries and waste collection, as well as transport, housing and education.
Local authorities have three main sources of revenue:
- Government grants from the central government for local services.
- Council tax levied on residential properties.
- Business rates, which is a property tax levied on business premises.
Over the year through December 2020, local councils in England received 23% of their funding from government grants, 50% from council tax, and 27% from retained business rates.
Unlike the central government, local government authorities are unable to borrow to finance spending. In order to ensure spending does not exceed annual revenue, they must either run balanced budgets or use reserves built up through underspending in earlier years.
Service provision
With regards to where funding originates from in the form of sales, fees and charges, while all regions throughout the country vary, on average local authorities in England received 25% of their sales, fees and charges revenue by providing social care to adults and children. This provision of services is a vital component of the Social Services for the Elderly & People with Disabilities industry, which relies on local government funding.
The provision of highways and transport provided 17.9% of local government service revenue in England in 2019-20. As local governments help provide transport services, a multitude of industries directly benefit from this, including the Intercity Passenger Rail Transport, Urban Passenger Rail Operations and Bus & Tramway Operations industries. These industries are often reliant on subsidies from local government authorities and during tough times will require central government intervention when local funding is not enough.
According to the data from the Department for Transport, the average ridership of national rail services was at approximately 4.6% of normal levels over the six weeks through 12 May 2020.
As this collapse in rail use led to almost no revenue, the government intervened with a six-month package of support through August 2020 to maintain industry services. In September 2020, this was replaced with the 18-month Emergency Recovery Measures Agreement, which was backdated to March 2020.
Other services that local governments collect revenue from include cultural, environmental and planning (24%), education (11.2%) and central services. Numerous industries across the country rely local government services in order to function. These include the General Secondary Education and Libraries, Museums and Cultural Activities industries.
The past decade
Local government spending power refers to the funds local authorities have to spend from government grants, council tax and business rates.
Over the 10 years through 2019-20, local government spending power fell by 16%.
This downward trend is largely a result of reductions in central government grants, which have been the most sharply cut component of local government revenue since 2009-10.
Central government grants were cut 37% in real-terms between 2009-10 and 2019-20, from £41 billion to £26 billion, adjusted for inflation.
While grants from central government were cut over the past decade, rates of council tax were increased. Adjusted for inflation, local authorities raised 25% more council tax in 2019-20 than in 2009-10.
Following changes made in the 2011 Localism Act, local authorities have not been able to raise council tax rates by more than 2% annually without holding a referendum since 2013. While Theresa May’s government increased this threshold to 3% over the two years through 2020, Boris Johnson’s government reduced it back down to 2% over the two years through 2022.
Between 2010 and 2015, the coalition government encouraged local councils to freeze council tax rates by offering them higher grants as a reward. In effect, councils that froze council taxes during this period did not lose revenue. However, after 2015, the government ceased to incentivise council tax freezes and then started to allow local authorities to raise local tax rates more rapidly (above the 2% threshold) in order to raise additional revenue for local services.
COVID-19 burden
During the COVID-19 pandemic, local government authorities lost revenue and spent more as a result of higher costs and increased demand for services. However, the effects of the pandemic have not been experienced equally by all local authorities in the United Kingdom. While local authorities have received more than enough central government funds to cover all COVID-related lost income and higher costs collectively, there is large variation between councils.
Some local authorities have been over-compensated, while other local councils have been under-compensated. Some councils within the under-compensated category drew down their reserves, while 73% of district councils and 46% of single-tier and county councils reported either having already used all reserves midway through 2020 or planning to do so by December 2020.
The total burden incurred from the COVID-19 pandemic amounted to £11.9 billion in 2020-21. This is broken down into local authority costs and lost taxes, sales fees and commercial income.
Outlook
The outlook for local government funding over the coming years can be broken down into three primary areas: the Spending Review, social care reform and the Build Back Better (BBB) paper.
Announced in September 2021, the central government’s reforms to adult social care will increase the value of assets a person can hold before they qualify for state support. The reform will mean that more people will be eligible for at least some level of state support for their social care costs, which local authorities will pay for.
In total, the government has provided local authorities with £3.6 billion between 2022-23 and 2024-25 to implement this. This additional £1.2 billion per year is equivalent to around 7% of local authority net spending on adult social care in 2019-20.
The 2021 comprehensive spending review was the first multi-year spending review since 2015 and set resource and capital budgets for 2022-23 to 2024-25. Local government spending power is set to increase by 3% per annum (adjusted for inflation) over the Spending Review period, which includes the additional £3.6 billion for social care reform.
Excluding the funds for social care reform, £4.7 billion (26%) of the increase in local authority spending power between 2021-22 and 2024-25 will be from grants, while £13.3 billion (74%) will come from locally raised revenues such as council tax.
Arguably the largest support for local governments over the next year is the BBB plan, which states that Councils in England will receive £53.9 billion in funding for 2022-23, including more than £1 billion of additional funding for social care. The package represents the largest cash-terms increase in grant funding for the past decade.
Set out by the Department for Levelling Up, Housing and Communities in December 2021, the BBB states that it will support local councils to play a significant role in the government’s transformative levelling up agenda as the country aims to builds back better from the pandemic.
Furthermore, BBB sets out to protect residents from excessive council tax increases. From 2022-23, the amount council tax can be increased will be 2%, with an extra 1% for councils with adult social care responsibilities.
Following a decade of falling local government finances and a heavy-burdened COVID-19 pandemic, the central government is making efforts to increase support for local government authorities. This is exemplified within the spending review, social reform and the BBB paper.
However, as of right now there is no real way to forecast the true impact these initiatives will have on local councils throughout the country and whether the central government will achieve its goal of ‘levelling up’. Whether these funds are targeted efficiently across local government authorities is yet to be determined.
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