Think tank warns council funding changes will shift money from deprived to rich areas

Changes to council funding rules in England proposed by the Government will shift money from deprived to rich areas, an economic think tank has warned.

Ministers’ plans to base assessments of councils’ funding needs for services like homelessness prevention, public transport and bin collections on population size alone – and not on deprivation levels – do not stand up to scrutiny, said the Institute for Fiscal Studies (IFS).

In its response to a Ministry for Housing, Communities and Local Government (MHCLG) consultation, the IFS warned the plans were likely to hit inner-city authorities in places like London, Manchester, Birmingham, Newcastle, Bristol and Hull, as well as poorer counties like Cornwall, Lancashire and County Durham.

They would benefit most other shire counties, especially in the South East, as well as large parts of suburban outer London.

Analysis by IFS researchers found that the Government was relying on a “poor justification” to explain its decision to assess funding needs on population size alone.

While ministers were right to say that differences in population statistically explain the vast majority of the variation in overall spending, the wide differences in authorities’ populations – from less than 40,000 in Rutland to more than 1.5 million in Kent – masked the impact of deprivation in determining spending needs per person, they said.

Meanwhile, the Government is not proposing to take population growth into account when assessing councils’ revenue-raising capacity, said the IFS.

This could result in a situation where fast-growing councils “gain twice over” by being allocated more money by the Government and allowed to keep extra tax revenues raised, while areas with slow population growth lose out.

IFS associate director David Phillips said: “Many of the Government’s proposals on assessing councils’ needs and revenue-raising capacities are eminently sensible.

“However, the statistical analysis it cites to justify not including deprivation in the funding formula for many key services does not stand up to full scrutiny.

“It is too early to say what the overall impact of the so-called Fair Funding Review will be on different councils – many elements like formulas for social care services are yet to be published.

“But if the Government does go ahead with plans to base the needs formula for services like homelessness, public transport and libraries on population only, our analysis suggests deprived councils will lose out.”

An MHCLG spokesman said: “The Government is currently consulting on what factors should be included in a new funding formula for local government.

“We will carefully consider the feedback before responding.”

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