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Local government finance review

March 17, 2011

Eric Pickles has just published a statement on the Local Government Finance Review.  Full text below.   Five quick thoughts on reading it. 

  1.  There is much to be welcomed in this wide ranging announcement and the ‘free councils’ advocates of local resoure autonomy (or “self-sufficiency”) will be particularly encouraged.  I can see the hand of the ‘free councils’  lobby at work
  2. Whilst it recognises that some areas will still need grant, it clearly signals that those authorities most dependent on grant and who gain from equalisation should be the most concerned about the review
  3. Although it says that the review of business rates and Tax Increment Financing are in Phase 1, and it does set out a swift timescale to report by this July, implementation could still be some way off? 
  4. The timetable is fairly swift for Phase 2 to get going in April but the signal is that Community Budgets still seem to be viewed as a second order issue when local government would benefit from the community budget approach right now as they deal with the frontloaded budget cuts.  
  5. It affirms the centralist and high handed assumption that Whitehall knows best when it comes to local taxation, with the line that taxpayers need ‘protecting’.     

The Secretary of State for the Department of Communities and Local Government (Eric Pickles):  I would like to make a statement on the work of the Local Government Resource Review.


The current dependency of councils on central grant allocations makes planning difficult, weakens accountability, and stifles local innovation.  In the future, I am keen to move to a radically different system of funding and support for councils that is built on strong incentives, is driven by local decision making and breaks this dependency.

I have therefore set up a review of local government resources that will consider how we can recast the distribution of business rates and Formula Grant to deliver a more effective income stream for councils.  The focus will be to free up as many local authorities as possible from dependency on central government funding, as well as develop better incentives for local authorities to promote economic growth in their areas and to benefit financially from that growth.  The first phase of the Review will deliver proposals for reform by July 2011.

The Review will consider the way in which local authorities are funded, with a view to giving local authorities greater financial autonomy and strengthening the incentives to support growth in the private sector and regeneration of local economies.

It will look at ways to reduce the reliance of local government on central government funding, increase local accountability and ensure that the benefits of economic growth are reflected in the resources authorities have.

The review will include consideration of changes to the business rates system, and focus in particular on:

a)       the optimum model for incentivising local authorities to promote growth by retaining business rates, whilst ensuring that all authorities have adequate resources to meet the needs of their communities and to deliver the commitments set out in the Spending Review; 

b)       the extent to which these proposals can set local authorities free from dependency on central funding;

c)        considering how to fund authorities where locally raised funding would be insufficient to meet budget requirements and control council tax levels, as well as councils who do not collect business rates, such as upper tier authorities, recognising that some parts of the country are currently more dependent on government funding;

d)       reviewing the scope for greater transparency and localisation of the equalisation process;

e)       the position of councils whose business rate yield would be significantly higher than their current spending;

f)        how to ensure appropriate protections are in place for business, within a framework of devolving power to the lowest level possible;

g)       how to deliver Tax Increment Financing proposals against a context of greater retention of business rate revenues;

h)       how various aspects of the business rate system, including business rate revaluation and reliefs, should be treated;

i)         examining the scope for further financial freedoms for local authorities, while standing up for and protecting the interests of local taxpayers, and

j)         the wider implications of rates retention for related policies, including the work of the Commission on the Funding of Care and Support and the Government’s other incentive schemes (the New Homes Bonus and the commitment to allow communities to keep the business rates for renewable energy projects).

The Review will take account of the responses made to the questions in “Local growth: realising every place’s potential“. It will also conduct extensive engagement with interested parties, including businesses of all sizes, to ensure that all views and perspectives are taken into account.  In developing the proposals, the Government is clear that businesses should not be subject to locally imposed increases in the burden of taxation that they do not support.

Following the announcement at the Spending Review and through introduction of the Welfare Reform Bill that Government will localise Council Tax Benefit, the Review will also consider the design of the new scheme (to be launched in 2013-14) and what flexibilities local authorities should have to help keep overall council tax levels down.

The first phase of Review will conclude by July 2011, followed by the necessary steps to implement the concluded reforms.

The second phase of the Local Government Resource Review will commence in April 2011 and will focus on Community Budgets. It will be taken forward in parallel with the continued roll out of these Budgets.  Detailed Terms of Reference will be published shortly.


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