The local government funding crisis and how to resolve it

With the election of Jeremy Corbyn as Labour leader for the second time we have been told that this has consolidated Labour as the “anti-austerity party”. Whilst this is certainly the aspiration of Jeremy and his supporters Labour can only be judged on what it does not just what it says. The election of a left wing leader cannot transform the Labour Party in and of itself. Many of the old guard whose politics are rooted in those of New Labour are still entrenched. After the Parliamentary Party Labour councillors were the section of the party where support for Corbyn was at its lowest and resistance to a break from the politics of New Labour at its highest. Labour in office in local government is anything but an anti-austerity party. Nationally Labour has, as yet, made no attempt to build a movement against the government’s austerity programme. It has not even attempted to assemble its local authorities to discuss organising resistance to central government’s assault on local government. Each authority is therefore left to its own devices to attempt at best to manoeuvre in the face of unprecedented cuts or at worst to simply administer them without question. We therefore see the spectacle of Labour authorities cutting services, closing Libraries, outsourcing leisure services, and in some areas attacking the wages and conditions of staff. In Derby and Durham they are cutting the wages of low paid teaching assistants, precipitating strike action by a group workers who have no history of militancy. In Durham a Labour council is proposing to issue redundancy notices aimed at forcing staff to sign up to new contracts which involve as much as a 23% cut in wages¹. (Read on below or download a PDF here localgovfundingcrisis )

In Nottingham a Labour Council is proposing to

• Remove the top 2 pay points in every grade;

• End weekend pay enhancements;

• Remove all contracted terms and conditions, such that benefits can be changed at the employer’s discretion without negotiation.

The council is writing to every employee asking them to sign up to the proposed terms individually. These are the actions of an anti-union employer. How can Labour build support amongst local government workers and supporters of public services if Labour councils are behaving in such a way?

Nobody can doubt the difficulties that local councils face as their budgets are reduced. Yet those who suffer the impact of the cuts will not just blame the Tories. The victims cannot be expected to wait four years for Labour’s white charger to come to their aid. Terrible social damage is being done and will continue to be done unless the government is forced to retreat.

Labour does not even have, so far as I can see, a strategy for addressing the crisis of local government. It’s not clear what it would do in office. If it had a perspective which combined defence of services today with a practical plan to put into operation, if elected, it would stand more chance of mobilising support.

Breaking the link between funding and social needs

In December 2014 I wrote an article on the crisis of local government – “Breaking the link between funding and social needs – local government finance”². It examined the impact of austerity on local government and the changes which were due to tale place. The allocations for funding for local authorities for 2014-15 and 2015-16 were set on the basis of reductions in the 2013-14 funding. The coalition government abandoned the annual assessment of local needs. A new assessment is not due until 2020. The government also encouraged local authorities to freeze council tax which has, of course, exacerbated the funding crisis and meant the cuts were deeper than they would otherwise have been.

Although councils will eventually be able to keep all their business rates this will be at the expense of a declining central government grant. By 2020 many local authorities will receive no grant at all. What this means is that instead of funding being based on an assessment of local needs, on the actual economic and social conditions of each locality, it will be subject to changes in economic activity. Under this system rich towns which have more expensive housing and hence more council tax income, will gain more, poor towns are will lose out.

A recent report by the Institute of Fiscal Studies underlines that poorer towns have had to make deeper cuts than their richer counterparts. It also explains that some councils will gain from the 100% business rate retention, others will lose, resulting in “transfers from areas with poor growth prospects to those with good growth prospects”. The system will lead to greater funding divergence and hence a greater divergence in the quality of services across England.

“Cuts have been much larger for poorer, more grant dependent councils than richer neighbours, who can raise more of the money they need via their own council tax revenues.”

According to the IFS the mainly urban and poorer councils have had to cut their spending on average by 33% as compared to 9% for richer councils amongst the tenth which are least grant reliant. Revenue from grants and redistributed business rates has fallen by 38% since 2009-10. Cuts in spending on planning and development, housing and culture and related services have been more than 40% on average, though even social services which has been ostensibly protected has been cut by an average of 10% in England.

Since since 2010 councils have had to deal with a real terms 40% reduction to their core government grant. The LGA estimates local government faces a £5.8 billion funding gap by 2019/20.

“The changes to local government finance in England during the 2010s will be truly revolutionary. We will have moved from a system where equalisation and insurance was paramount to one with more emphasis on incentives for growth, but also more financial risks for councils,” said David Phillips, a senior research economist, and an author of the report….Along the way there will be lots of tricky policy decisions. And there are big picture questions, such as whether these changes will actually empower councils to deliver more growth, or just burden them with additional revenue and spending risks.”

The reality is that local authorities do not have equal capacity to grow business rates or Council Tax. Inequality both locally and nationally will grow.

“Our care and support system is in crisis”

All across the country local authorities are cutting services to a degree that they have never done before. Libraries are being closed by local authorities of all political stripes. Social services are being put under severe strain. A new report by the Local Government Association explains how adult care is facing an unprecedented crisis.

“For too long the service has too often been seen by decision-makers as an adjunct to the NHS, rather than a service of equal importance. A lack of recognition in terms of profile has combined with a lack of recognition in terms of funding to place our care and support system under enormous pressure. This has been particularly acute since 2010 and although governments of the day have responded with their own well-intentioned solutions, they have failed to properly resolve the gap between available resources on the one hand and cost, demand and pressures on the other.

The situation is now critical and it is no exaggeration to say that our care and support system is in crisis.”

Councillor Izzie Seccombe (Chair, Community Wellbeing Board LGA)

Adult Social Care: state of the nation report 2016

We hear much of the need to ensure spending is concentrated on adult and child social care. However, between 2011/12 and 2015/16 councils had to deal with a £5 billion funding gap in adult social care. This led to spending standing still and declining in value in the face of inflation and increasing needs of an ageing population. People who should be receiving a service are deemed not to be ‘severely’ disabled enough to get it.

Year	2011/12	2012/13	2013/14	2014/15	2015/16*
Net spending/£Billion	14.5	14.7	14.6	14.5	14.1

*£168 million overspend

The government has allowed councils to raise a 2% precept for social care and increased the Better Care Fund. They present this as evidence that adult social care is not underfunded. “However…the unsteady state of local government funding overall negates the full benefit of this additional resource,” says the LGA.

The Voluntary Organisations Disabilities Group says:

“People are using care services at a time of unprecedented demographic change and financial austerity. Fewer and fewer disabled people are eligible for services and unmet need is on the rise. High quality care must be funded to enable disabled people to have their needs met…Without adequate funding voluntary organisations will exit the market causing further market instability…Should social care markets fail, the lives of millions of people who use services will be negatively affected. There will also be a direct impact on the NHS.”

And the Health Select Committee said:

“Cuts to social care funding over a number of years have now exhausted the capacity for significant further efficiencies in this area. We have heard that the savings made by local councils in the last parliament have gone beyond efficiency savings and have already impacted on the provision of services. Based on the evidence we have heard we are concerned that people with genuine social care needs may no longer be receiving the care they need because of a lack of resource. This not only causes considerable distress to the individuals concerned but results in significant additional costs to the NHS.”

It says that adult social care “is in a perilous position”.

A balanced budget in a 5 year Parliament?

So what can be done to address this chronic underfunding which local government faces. Here we come hard up against Labour’s policy in relation to public spending. John McDonnell has, unaccountably, committed Labour to a balanced budget, within the lifetime of a Parliament, under ‘normal circumstances’, whatever they might be. This would mean in effect tying themselves to whatever Tory spending level they were bequeathed if Labour was elected. This is like voluntarily placing yourself in a straight-jacket.

This policy should be seen in conjunction with John’s commitment to maintain the ‘independence’ of the Bank of England; i.e. its power to determine interest rates. That John has adopted a policy which was originally introduced by Blair and Brown, is to say the least somewhat disappointing. Bank of England ‘independence’ is based on the myth than the setting of interest rates is a technical, ‘non-political’ decision. This is complete nonsense. This policy was introduced at the very beginning of the Blair government, without a discussion in the Shadow Cabinet. It was adopted partly because of their support for neo-liberalism and partly for cynical opportunistic reasons. Although Brown presented it as a means of “convincing the markets” of New Labour’s “fiscal rectitude” (they stuck to Tory spending limits for the first 2 years in government), Balls explained in a paper presented to a meeting of the New Labour vanguard (Prescott was excluded from the meeting) the real motivation.

“This loss of operating freedom could bring substantial benefits as well as a credibility boost. It would allow a Labour government the political freedom to criticise or express doubts about interest rates even when there is clearly little option to raise them – just as Clinton has been able to express public misgivings about the Greenspan rate increases while privately supporting them…

Most important, independence means there is someone else to blame/be blamed if things go wrong for reasons which no central banker or politician could either anticipate or control…”

Such were the principles of New Labour.

Local authority debt

If the current government policy in relation to local government is unchallenged (other than with words) then local services will be decimated in its remaining years in office. Labour under Corbyn and McDonnell has said it would borrow for capital projects. But if it supports a ‘balanced budget’ over a parliamentary term this means it will do nothing to address under-funding of local government current spending.

There is a way, however, in which the financial crisis of local government can be addressed without strictly speaking “creating money” or taking on more debt. Local authorities have £64.817 billion of debt³ held with the Treasury’s Public Works Loan Board. If Labour wanted to carry out a radical measure which would address the under-funding of local government resulting from the austerity programme, they could write-off/cancel this debt. The annual payments for this debt made by councils to the PWLB in 2015-16, were £2.930 billion interest payments, and £2.131 billion repayment of the principal (the original loans). If the debt was cancelled this would provide councils with an additional £5 billion spending capacity each year. If this was too radical for them and they merely suspended payments an emergency measure, this would provide councils with an additional £25 billion over 5 years. Of course, given the scale of cuts which have taken place, councils would not necessarily be able to spend it all but it would transform their circumstances and provide the resources to begin to address the crisis faced by council services.

The cost to the Treasury would be the loss of £5 billion a year, a modest sum for the national economy; a measure which would be more beneficial than taking on more debt. The extra spending would provide a significant economic stimulus based on socially useful activity, be it social care, building of council housing, the return of libraries and so on.

Talk of ‘new politics’ is empty rhetoric if Labour maintains the ‘independence of the Bank of England’ and a ‘balanced budget’ over 5 years. The austerity programme has been socially disastrous since 2010. Without the building of resistance to what the government is doing the damage will continue and by 2020 a system will be in place where equalisation of services is abandoned for ‘incentives’ which will ensure the richer authorities will gain and the poorer ones will lose.

If Labour is to provide a practical alternative it needs to combine the building of resistance to the government by trades unionists, service users, and local authorities, with a clear programme which will offer a fundamental break with austerity, and begin to mend the damage done. Cancellation of local government debt can form the bedrock of such a programme. If Labour councils see no prospect of a change they will continue to implement socially damaging cuts because they believe they have ‘no choice’. However, they can’t expect the victims of austerity to vote for them because they have ‘no alternative’. Labour cannot be ‘the anti-austerity Party’ without challenging in practice the government’s assault on public services. It certainly cannot leave in place a system which entrenches local and regional inequalities. It will have to commit to returning to a system which sekks to equalise services, basing the funding on the actual economic and social conditions in each area; based on social needs rather than ‘incentives’.

Martin Wicks

November 11^th 2016