Blog Post

Local authority funding: the levelling up sting in the tail for London?

In the midst of the government’s levelling up pledges, our Research Director Claire Harding stresses the need for London’s local authorities to receive the funding required to prevent the capital being levelled down.

Deep in the government’s
Levelling Up White Paper, published last week, was a commitment to “empower local leaders with the resources they need to level up their communities. This means a commitment to ensuring that funding allocations for councils are based on an up-to-date assessment of their needs and resources”. In other words, they want to change how money from the Treasury is allocated to local authorities. This isn’t a new promise – Government ran a Fair Funding Review in the last parliament, and the outcome was postponed because of the pandemic – but the fact that it is linked to the levelling up agenda, with its rather anti-London tone, might make it more worrying for London. 

The promise to ‘empower’ leaders here is misleading: empowerment is not the same thing as cash. The majority of local authority spend is not discretionary, as it is for things that councils are legally required to provide, particularly adult social care and children’s services. Of course, no council would want to stop providing these things. But it leaves councils little real control over how things work in their area. The picture is similar for revenue raising: councils in England don’t have much control over how much money they can raise, so the amount of money they get from central government is hugely significant.  

It’s true that local authority funding formulas are pretty out of date, partly because successive funding formulas have been based on previous spending, which is in turn based on older funding formulas. This can be a real problem because needs change: for example, when there has been lots of housebuilding or when the types of people who live in an area change. In London, rising house prices have meant that young couples who might previously have moved from small flats to larger houses when they start a family are increasingly likely to stay – meaning more demand for maternity services, family support, and childcare. 

The promise to review the funding formulas is likely to worry some local leaders in London, because they are concerned that their areas will get less as the government puts a lower priority on inner city problems. Others, especially outside the central boroughs, may be optimistic that their particular needs will get more attention and funding. Whatever the outcome, it’s likely that it will take a while to work out the situation because local government financing is so complex – this makes it all the more important that local authorities and other public sector organisations in London can work together to make the case for what they need. 

What’s changed in recent years 

Since 2010, the amount of money local authorities have to spend in total has fallen significantly – most of the fall was before 2015. Many elements of public spending were hit hard in the austerity years that followed the financial crash of 2008 and subsequent change in government, but local government spending fell faster than other departments. These cuts did not fall evenly across the whole country: more deprived areas lost more.  

Local authorities’ statutory obligations have not changed during this time, so a higher proportion of their money has been spent on essential services, especially adult social care. And in the last two years, Covid has hit local authority’s spending plans – they have needed to spend more on some areas, and they have been able to raise less revenue, particularly from business rates as so many companies have been struggling. Government has supported them to meet the cost of these changes, but the system has been imperfect – some local authorities have got less back than they have lost, and others have got more. In some areas, especially inner London, the long term impact of Covid on business rates is uncertain – we still don’t know when, if ever, tourism, retail and hospitality spend in the city centre will return to pre-pandemic levels. 

What change might look like: weighting the index of multiple deprivation 

If funding allocations for councils are going to be based on an up-to-date assessment of their needs and resources, what might this look like?  

Some funding decisions are made on the basis of the Index of Multiple Deprivation (IMD), which looks at various different domains of deprivation to give an overall score for an area. This includes income, and also things like access to services and jobs and the quality of the environment. There are seven areas in total and they aren’t weighted equally: income is scored higher than crime, for example. It’s become an important tool for talking about needs and resources, used widely by policy makers, grant funders, advocacy groups and journalists. Like all index measures it is imperfect, but the mix of domains is helpful as it makes it possible to compare different areas – the challenges of poverty in rural Lincolnshire and in Tower Hamlets can be very serious in different ways. 

London and other urban areas tend to score pretty badly on areas of the IMD that look at homelessness, house prices and air quality, and much better on distance to services like GPs and supermarkets. In rural areas, the position tends to be reversed. If a government wanted to reduce funding to urban areas while keeping a deprivation index measure, it could reduce the importance given to environment and housing, and increase the importance of distance to services. It might seem like quite a small change, but the consequences could be very significant. 

Claire Harding is Research Director at Centre for London.  Read more from her here.