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Can Labour solve the local government funding crisis?

8 min read

“All political parties in opposition love local government – it’s what happens when they get into government that counts,” says Stephen Houghton, Barnsley council leader and chair of the Special Interest Group of Municipal Authorities (SIGOMA). 

“I think local government will, as always, take a back seat to national issues such as the NHS crisis in the next general election,” he says. “But if the incoming government does not prioritise local government and the essential services it provides, voters will hit them in the next polls as their libraries close, their streets are unswept and social services chronically under-resourced.”

Reserves have been drained; services and staffing levels cut to the bone in many places. Now councils are filing section 114 notices – effectively bankruptcy which prevents all new spending except for statutory duties – at an unprecedented rate, with at least 26 more saying they are considering the drastic option.

“Ten years ago councils were warning that funding was going down and demand going up at an unmanageable rate,” says Pete Marland, Labour’s local government finance spokesperson. “Another decade of austerity and they are in a perilous state. People are really going to start feeling it,” he adds.

“We will undoubtedly see an increase in 114s and virtual 114s, where councils haven’t gone bust but the same measures that would be taken under a 114 will be necessary.”

A handful of councils, including Woking, Croydon and Thurrock, have made high-risk investments in desperation to balance their books, resulting in crippling debts – £1.2bn in Woking alone. But other councils say inflation, rising demand for services – especially adult social care – and powerlessness to increase income have created a perfect storm in the wake of 13 years of austerity.

Stuart Hoddinott, a senior researcher at the Institute for Government, says: “I haven’t seen very much at all from Labour that is really addressing the underlying issues of local authority finances.

“Labour have been very quiet about any potential bailouts because this is a difficult political situation. If it were just one or two local authorities, there would be an argument for it. But this has become widespread rather than exceptional and the safety net of bailouts can incentivise unacceptable risk.”

UK councils have four main streams of revenue: council tax (wedded to property values); business tax (dependent on the local economy); central funding; and money raised through council business such as parking services. However, they have fewer powers to raise revenue locally than in any other G7 nation, with 95 per cent of the UK’s tax revenue and 75 per cent of public spending controlled centrally. Labour has indicated it would change that, but hasn’t yet made it clear how.

While the party has so far offered little in the way of electoral pledges around local government, its vision is set out in a number of reports and speeches which have revealed the economic case for, and an ideological commitment to, the devolution of fiscal power and policy.

The 2022 Starmer-commissioned constitutional report written by Gordon Brown calls for an economic growth plan for every town and city, long-term financial certainty to enable meaningful investment, more fiscal powers to generate revenue, and more regional representation in national public services and decisions. 

After the publication of the report, Starmer unveiled his “take back control” bill which he said would devolve powers over transport, energy, climate change, housing, culture, childcare and employment support, calling it “a new approach to politics and democracy”.

Labour has also pledged to invest in a green revolution which Starmer says will focus on building infrastructure and drawing international investment into deprived former industrialised areas to help stimulate growth and develop a highly skilled workforce for the future.

While broadly welcomed by local government leaders and unions, these comprehensive reforms will take time and many councils are at risk now.

They are calling for urgent reforms to the tax collection and redistribution system so it is based on need rather than local revenue-raising capacity, and an end to the current competitive bidding for limited levelling-up pots.

Unison’s head of local government, Mike Short, says: “We welcome Labour’s commitment to devolution of decision-making but the devil will be in the detail.

“Labour has touched on some issues of taxation – they don’t talk about council tax but they do talk about replacing business rates, which need reform,” he adds. “Raising council tax is not the answer; it hits lower-income people disproportionately while more deprived areas have a lower council tax base. Labour needs to address reforms to council tax.

“There needs to be greater fairness in the way local government is funded,” he says. “This is something we hope a Labour government will be better at than the current government.”

Shadow chancellor Rachel Reeves has vowed to keep a vice-like grip on spending, strongly suggesting there would be no financial rescue packages from a future Labour government.

“The message from the shadow treasury is loud and clear: there is a need for fiscal discipline,” says Marland, also Milton Keynes city council leader and chair of the Local Government Association Resources Board. “It wouldn’t be right to give council leaders the impression that from day one of a Labour government we will get the £10bn we have lost over the past 10 years.”

Houghton says his group, representing 47 mainly urban councils including some of the most deprived, had talked to Lisa Nandy, who was shadow levelling-up secretary until Starmer’s September reshuffle, and “a couple of other shadow front benchers” about the need for change, and felt satisfied they recognised the urgency.

Ten years ago councils were warning that funding was going down and demand going up at an unmanageable rate

“However, we haven’t had any promises,” he says. “We are anxious to continue that dialogue with her successor, Angela Rayner, over the next 12 months and beyond.

“The big change that’s needed is going to take three or four years. The immediate question is: what can government do in the short term?

“One thing we have asked for is the local business rate retention scheme to be reset and redistributed in terms of need.”

Councils are currently allowed to hold on to half the business rates they collect, favouring areas with the healthiest economies.

“There’s £4bn in there,” says Houghton. “Even a partial reset would help get money to the places that need it most. That’s an easy win and [would] allow Labour to support those red wall areas that have suffered most.”

But there is a long way to go before Labour can win the extra 124 seats it needs for the overall majority to effectively reform local government, and Starmer’s campaign team see party discipline as key, putting the centre on a collision course with some of the party’s most loyal soft-left servants in the devolved nations and regions.

Under the uncompromising stewardship of campaign director Morgan McSweeney, Labour has been weeding out prominent Corbynites, trade unionists and leftwingers by placing centrally chosen parliamentary, mayoral and council leadership candidates on a preferential list and excluding others on ostensible grounds which have included liking a tweet from Nicola Sturgeon.

The move has led to accusations of a Blairite purge and an increasing centralising tendency which undermines Starmer’s talk of devolution.

In the North East, sitting North of Tyne mayor Jamie Driscoll resigned from the party after being deselected from the running for the new powerful post of North East mayor and has raised more than £100,000 in crowdfunding to stand as an independent, showing the strength of feeling in the region about central interference.

He says: “This is about groups of allies – nothing resembling ideologies. This is a good old-fashioned clique and control freakery. Labour nationally doesn’t talk to local government very much. At no point have the mayors been asked: what should we do on regional government?

“There is a huge amount of energy gone into purging the party in a way that Tony Blair never did. They weren’t micro-controlling the party. What’s the shadow cabinet doing in terms of policy?

“The unacceptable levels of regional inequality in this country are largely down to centralised policymaking which cuts out regional government in decision-making processes to an extent far more extreme than any other comparable nation.” 

Will these tensions impact the general election? Driscoll thinks not.

“But what we are seeing is a surge in support for independent and Green candidates which could have a longer-term impact,” he says.

However, some point to the example of Birmingham as evidence that party discipline needs holding together at the centre.

Last month the city council, Britain’s biggest local authority, joined the growing section 114 club after Labour intervened to replace council leader Ian Ward following an internal report that accused the local party of being dysfunctional. The new leadership inherited liabilities of up to £750m. The £1bn bill Birmingham has accrued over 10 years in gender equality settlements will also sound alarms to other councils which may face similar challenges.

Marland adds: “The Labour Party has been properly taking notice of local government and is applying the same rules and levels of discipline to mayors and council leaders and local government selections as they have done to parliamentary selections. In the long term it’s about increasing the quality of councillors and convincing the doubters that local government is fit to govern and be devolved to.”

Angela Rayner’s office was contacted for comment, but did not respond.

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