Dean Hochlaf's analysis finds the most deprived communities are set to face a council tax rise, despite cuts to local services.

The recent Spending Review outlined a much-needed funding boost for local government. However, while the promise of additional funding is welcome, it will be heavily dependent on local taxes being raised and will not be enough to maintain existing services. Across the country, many communities will face a reality where they must pay more taxes for diminished local services.

The prospective increase in local government funding potentially disguises the scale of the fiscal challenges ahead. The Spending Review promised that Core Spending Power, the funding available to councils to deliver services, was set to increase from £50.4bn as of 2021/22 to £58.9bn by 2024/25, estimated as an average 3% increase per-annum in real-terms.[1] However, some of this funding is set aside to implement social care reforms. While it remains to be seen whether this will address the major shortcomings in the social care system, it will mean that the real-terms increase for all other services will average 1.8% per annum, well below what the average government department can expect, and just below the amount needed to maintain service provision at existing levels.[2] This ultimately means councils will face the difficult decision to cut certain services as we continue to endure the fallout from the Covid-19 pandemic.

Not only is the additional amount inadequate, but it is also heavily dependent on local taxation. It is estimated that 74% of the additional £18bn nominal spend between 2021/22 and 2024/25 “will come from locally raised revenues”.[3] In today’s money, this suggests that local communities across England will pay an additional £7.5bn in local taxation over the next three years,[4] despite the fact local councils are also anticipating that they will need to cut services. It is likely we are facing a scenario where people end up paying more for less.

The nature of local taxation, in particular council tax, makes it even more difficult to justify this situation. In part, this is due to the fact that council tax rates are a reflection of historical house prices.[5] In addition, while councils had freedom to set their own rates prior to 2005 (which led to divergences in local rates), subsequent reforms have placed controls over the rate at which council tax can be increased each year, which has narrowed the ways in which local government can “maintain financial sustainability”.[6] As a consequence, council tax can be regressive and often fail to raise the funds that reflect the needs of the local community.

Regressive elements will likely come into play as local governments are expected to raise tax rates by the maximum possible amount. New analysis from the Centre for Progressive Policy finds that those living in some of the most deprived areas of England, including Liverpool and Nottingham will pay upwards of £200 more between 2022/23 and 2024/25 if their rates are raised by the maximum amount. In contrast, those living in Band D households in more affluent communities, such as Westminster and Windsor and Maidenhead will pay less than £160 more during this same period.

Such discrepancies emphasise the unfairness that has been baked into the council tax system, where the tax rate is based on historical determinants, rather than current economic conditions.

While places will have little choice but to raise local taxes, they will continue to face fiscal challenges as the world continues to struggle with the Covid-19 pandemic which has had a significant impact on the economy. New variants may continue to emerge which threaten to dampen economic activity and increase demand for local services. Household disposable income is expected to rise by 0.3% next year, far below the expected inflation rate of 4%.^[7] This amounts to a real terms pay cut, which could also stymie the local economy, with implications for business rate revenues.

Not only are revenues at stake, but also the cost of providing services, notably social care. Social care has increasingly demanded larger shares of local budgets, and with population ageing and stagnating healthy life expectancy, it is likely the pressures to deliver social care will continue to mount over the next few years. The cost of delivering care will also rise The National Living Wage for over 23-year-olds is set to rise by over 6% to £9.50 in April.^[8] While welcome, this will have significant implications for the cost of providing social care, given the labour-intensive nature of the sector and significant proportion of the workforce who earn below this amount. Increasing costs at a time of economic hardship will exacerbate the potential funding shortfall many local councils are set to face.

Unless additional financial support is forthcoming, it is likely that the Spending Review will fail to translate into material improvements for many local communities. At present, we face a situation in which local government is compelled to increase the tax burden on millions of households, without improving the availability or quality of social services.

Post Budget CT Analysis