Last week George Osborne revealed the details of his 2016 Budget, at the centre of which was a major deterioration of the forecast for productivity growth. Last year, the Office for Budget Responsibility (OBR) projected an average growth in productivity per hour of 1.9% between 2015-16 and 2020-21; that average is now 1.7%.
As a result, a further £3.5 billion of savings from public spending is to be found in 2019/20. While Osborne has suggested these savings are equivalent to 50p in every £100 the government spends, experts have warned that the figure is closer to £2 or £3 for services that haven’t been protected.
What does it mean for local government?
Despite no direct cuts for local government, it remains unclear where these savings will come from. And with ring fencing of much public spending, local government may yet again bear the brunt of these cuts one way or another.
Concerns have been raised over the announcement to extend business rate relief, the revenue from which is 50% retained by councils. It was revealed that this will remove £7 billion from the total take in England over the next five years; 600,000 small businesses will pay no rates at all from next year.
While good news for small businesses, there are fears it could leave a huge hole in local government finances as all locally raised business rates are to be fully devolved by the end of 2020. This will be accompanied by the phasing out of central government grants, and the devolution of additional spending responsibilities.
The government says that “local government will be compensated for the loss of income as a result … and the impact considered as part of the government’s consultation on the implementation of 100% business rate retention in summer 2016.”
But details of how such compensation will work remain unknown. The Institute for Fiscal Studies (IFS) has suggested that the government’s plans for reimbursing local government is “nigh on impossible”.
According to the Joseph Rowntree Foundation (JRF), if protection for council budgets isn’t extended to beyond the devolution of business rates, councils stand to lose £1.9bn per year, or 2.9% of their total revenues.
Further cuts to welfare spending could also have a knock-on effect. The Chancellor outlined controversial plans to reform Personal Independent Payments (PIP) for disabled people, to save £1.3 billion. Overall, £4.4 billion will be cut from benefits for disabled people over the course of the parliament.
The cuts to PIP have been described as ‘devastating’ for disabled people, with many relying on them to live independently. They could therefore lead to increasing pressure on already stretched local services.
Even the government’s own party members criticised these cuts, which have since led to the shock resignation of Iain Duncan Smith and a government U-turn on the reforms to PIP, which will now not go ahead.
But there is no alternative plan to fill the hole left by this U-turn so local government may still need to brace themselves for cuts elsewhere.
Under the education reforms, every state school in England is to become an academy by 2020 or have a plan in place to do so by 2022, ending the century-old role of local authorities as providers of education.
But, as our recent blog has highlighted, there are ongoing concerns over the academy programme with little evidence to justify it.
The plans have been criticised by councils and teaching unions. Chairman of the Local Government Association (LGA) children and young people board, said:
“We have serious concerns that regional schools commissioners still lack the capacity and local knowledge to have oversight of such a large, diverse and remote range of schools.”
Ofsted rated 82% of council maintained schools as good or outstanding, while the results of recent HMI inspections of academies has been described as “worrying”. The findings also highlighted a “poor use of public money”, something that has been reiterated by the LGA.
In response, the LGA noted that “councils have been forced to spend millions of pounds to cover the cost of schools becoming academies in recent years”.
There was some better news for local government in the form of new devolution deals with the West of England, East Anglia, and Greater Lincolnshire. The West of England and East Anglia will each receive a £900 million investment fund over 30 years to boost economic growth, while Greater Lincolnshire’s deal is worth £450 million.
New powers over the criminal justice system are also to be transferred to Greater Manchester and business rates are to be fully devolved to the Greater London Authority next year, 3 years before everyone else.
The LGA welcomes these deals as recognition of the economic potential of all local areas and calls for a return to the early momentum in which similar deals were announced last year.
Another positive for local government was the £700 million funding boost for flood defences by 2020-21, including projects in York, Leeds, Calder Valley, Carlisle and across Cumbria, to be funded by a 0.5% increase in the standard rate of Insurance Premium Tax.
Considering the extent of recent winter flooding, this was welcomed by local government as a “step in the right direction”.
However, the LGA has stated that councils will need further help from government once the full cost of recent damage emerges. It has also called for flood defence funding to be devolved to local areas so the money can be spent on where it is really needed.
So despite no direct cuts for local government, and the welcome boost to local economies and flood defences, it remains to be seen whether local government will lose out financially in the longer term.
By Heather Cameron, Idox