Autumn statement: what will be the fate of local government?

Much of the public sector will have breathed a sigh of relief yesterday at Spending Review cuts that, while certainly tough, were by no means on the scale many had predicted.

Not local government leaders, however—who are faced with soaring demand for social care on top of a 56 per cent cut to the local government central grant over this Parliament. Despite some welcome announcements in the shape of new powers over business rates, and confirmation of the city devolution deals announced earlier this year, the Spending Review clearly offers local leaders a tough settlement. But what will it mean for different places around the country?

The city deals agreed by Manchester, Sheffield, the North East, the West Midlands and Liverpool, represent a significant step forward, giving local leaders greater control and influence over transport, strategic planning and skills, as well as more opportunities to attract private sector investment. Manchester will also be breaking new ground with its ability to integrate health and social care locally. By 2017 these city regions will have metro mayors with the power to raise business rates in order to pay for major infrastructure projects, and who can also act as ambassadors to attract businesses and represent their interests nationally and internationally.

Yet even in these big cities, the financial climate will be tough. In some ways, that will be alleviated by Government plans to allow local authorities to levy a 2 per cent council tax "precept" to fund social care, as well as the new powers to retain 100 per cent of revenues generated by business rates and the sale of public assets. It's certainly progress that councils who support economic growth by taking difficult decisions about building more houses or investing in transport should see some financial benefit. But none of these measures will be enough to fill the gap created by high demand for social care.

It’s true that business rates are predicted to grow by more than the £6bn grant they will replace, leading the Government to claim that spending on local government as a sector will stay the same in real terms over the course of this Parliament. But we also know that the places where business rates grow the most won’t necessarily be the places where need is highest.

Take Blackpool for example, a city with an ageing population, small council tax and small business rates, and one that is not close enough to a large city to be part of a wider city region economy. There are big questions over how cities like Blackpool will cope in a system where an increased proportion of the money available to local councils will be entirely dependent on their economic performance.

Such concerns will lead many to focus immediately on how business rates will be redistributed under the new system, from relatively prosperous areas to those with weaker economies. Of course this matters. But the way to do this, in a world where public spending is constrained, is not to look first at redistribution, but instead to incentivise economic growth that increases the total amount of money available to local government from 2020 onwards.

That means delivering a system that not only encourages and rewards struggling cities like Blackpool for adopting the right approaches to skills, planning or transport investment that could grow their local business rate base in the future. It also has to incentivise places where economic demand is already high—like Cambridge, Brighton, Reading and Oxford—to approve more development and accelerate their own growth, therefore generating more business rate receipts to be retained locally and significantly increasing the amount available to be redistributed to less well-off places.

This would be a good start. But over the long term it’s unlikely to be enough for even more prosperous places to rise to the social and economic challenges that they face. If UK cities are to thrive in the future and maintain high quality public services at the same time as public expenditure is reduced, we need an overall public finance system that puts funds together at a local level, wraps public services around people, and genuinely rewards decisions that support economic growth.