The Ministry of Housing, Communities and Local Government's (MHCLG) proposed overhaul of the way local authorities are funded has been dealt a significant blow by a critical technical peer review from the Institute for Fiscal Studies (IFS). The report, commissioned by MHCLG itself, raises stark warnings that the new formula could worsen existing inequalities between English councils, with some gaining significantly and others losing out.
Currently, the system for distributing central government grants to councils relies on outdated data and assumptions from over a decade ago. MHCLG's stated aim is to introduce a more transparent and fairer system that better reflects the varying needs and resources of different local authorities across England. However, the IFS review suggests that the proposed methodology falls short of this goal, highlighting several key technical flaws that could lead to unintended and potentially damaging consequences.
One of the primary concerns raised by the IFS is the method used to calculate 'relative needs' – the differing service requirements of various areas – and 'relative resources', which assesses a council's ability to raise income locally, for example, through council tax. The review argues that the proposed approach for these calculations is problematic, potentially leading to inaccurate assessments that do not genuinely reflect the financial pressures and capacities of individual councils.
The new formula could lead to significant and arbitrary funding shifts between different types of local authorities and geographical regions, placing considerable strain on councils already struggling with tight budgets. This could impact the delivery of essential local services, such as education, healthcare, and social care. The report stresses the importance of a robust and equitable funding mechanism, especially given the ongoing financial challenges faced by local government.
The peer review underscores the complexity of designing a fair funding system and highlights the critical need for meticulous technical assessment. The IFS recommends that MHCLG addresses these fundamental issues before proceeding with the implementation of the new formula, urging for a more comprehensive and robust approach to ensure that funding genuinely aligns with local needs and avoids exacerbating existing disparities.
Years of debate and multiple attempts to reform local government finance have failed to yield a satisfactory solution, complicated by varying demographics, economic conditions, and service demands across England's diverse local authorities. The findings from this independent review will likely add further pressure on the government to ensure any new system is both fair and sustainable.