The final four posts on local government and independence start with a look at money.
Firstly, a word of warning.
Due to the current perilous state of the UK’s public finances – and the incompetence of the last several UK governments – it would be difficult for anybody, let alone me ( without a university economics department or privately-funded think tank at hand) to make any projections on Welsh local government finances for the foreseeable future other than to say “things are looking a bit shit”.
I know full well when to cede to others’ knowledge of public sector economics.
So this post is more about policy options than spreadsheets and graphs. So it all comes with a healthy pinch of salt.
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One complaint raised in the Senedd during the last term – usually, but not always, from the Conservatives – is that the distribution of funding (particularly revenue settlements) is “unfair” or is biased towards Labour-controlled councils.
There’s little evidence to support this on the whole and there will always be natural year-to-year fluctuations in how much each of the 22 unitary authorities gets. In 2022-23, you can argue that it disproportionately favoured Conservative-controlled councils2.
The long-standing argument from the Welsh Government is that they will look at the funding formula if requested by council leaders, but no such request has been made. Most of the Welsh Government’s research in the area has focused on income generation/taxes rather than the funding formula itself.
Reform the local government formula – There are around 65 different factors used in the calculation of the local government settlement – you can see the full list here for 2022-23 (doc – p15-17). One solution would be to change weightings to take into account the difficulties in providing services in rural areas or areas with high numbers of children and/or older residents.
Set a funding floor – Some political parties and Senedd committees have argued for this. A funding floor would ensure every council receives a minimum increase in their revenue grant (when increases are announced by the Welsh Government). This would be highly dependent on public finances and could be equally set so no council has a budget cut deeper than the floor.
Allow local authorities to keep a greater share of their business rates income – Assuming business rates continue as is, instead of the Welsh Government redistributing it, councils can keep a proportion of what they raise for themselves. Research from the Welsh Centre for Public Policy3 notes that allowing councils to keep more of their own business rates would lead to greater regional disparities (because less funding is redistributed from areas with high business activity – like Cardiff – to areas with low business activity).
Contestable funds – The Welsh Government already (sort of) does this for certain capital grant schemes – for instance, active travel. Under a system of contestable capital grants, councils would bid for funding. While all councils would receive a core allocation, only the projects with the strongest business cases would receive full or partial funding from the grants. This might lead to better value-for-money decisions, but could prompt more “pork barrel” projects, with the Senedd being too influential in decisions if MSs successfully lobby for projects in their patches to be green-lit.
Multi-year budget cycles – Another long-standing complaint is that local authority budgets are set annually and are dependent on Welsh Government and UK Government financial plans, sometimes only giving a few weeks to finalise or draft budgets.
UK Government plans wouldn’t matter after independence, but putting local government funding on a three-year funding cycle (similar to the current local health boards) might give council finance officers and councillors more time and space to plan spending across several years. There’s also the possibility of allowing councils to go into deficit as long as they break even across the three-year cycle.
Borrowing powers – There’s little need for major alterations here. “Prudential (unsupported) borrowing” could continue as it is, but could be expanded to include municipalities and provinces. “Supported borrowing” – usually led at the national level – would presumably continue, though the rules could be tightened so it can only be spent on significant capital projects.
Maybe there’s an argument for giving local authorities more borrowing freedom to raise extra money – for example, tax increment financing (TIF), where the cost of borrowing is based on an increase in future tax revenues as the result of capital investment.
2. Welsh Government (21st December 2021). “Written Statement: Provisional Local Government Settlement 2022-23”. Available here: https://gov.wales/written-statement-provisional-local-government-settlement-2022-23
3. Welsh Centre for Public Policy (7th February 2019). “Growing the Welsh tax base through business rates: risks, rewards and trade-offs”. Available here: https://www.wcpp.org.uk/commentary/growing-the-welsh-tax-base-through-business-rates-risks-rewards-and-trade-offs/
