Budget 2012 and the Local Finance Bill: the case for redistribution?

Budget 2012: it’s hardly going to down in history as a landmark Budget for local government. No big giveaways and no big hits. You may think that Labour councils would be breathing a collective sigh of relief. Afterall, friends in Manchester will be welcoming the announcement of the City Deal for Greater Manchester, which intends to give new powers, including the ability to ‘earn back’ tax generated by investing in infrastructure to boost local growth. DCLG think this could amount to as much as £30 million a year of tax. These City Deals are being negotiated with eight core cities – six of which are Labour controlled councils*. Good news.

But it’s not the Budget that Labour local authorities are concerned about. It’s the financial reforms that are proposed in the Local Finance Bill. The government’s political principles behind the reforms are intended to make local authorities less reliant on state funding and give them more financial autonomy. But if you turn this on its head, actually what you are look at is moving away from, and reducing the levels of redistribution that takes place. Redistribution is a vital part of the finance system for some Labour authorities.

One of the deals in the Bill is to enable local authorities to retain a proportion of the business rates generated in their area. Although the government states that there will be no overnight winners and losers from this; put in very simple terms, councils will get more money from business rates paid by new business and will get less money should businesses close down or move away from the council area. Whilst you can argue that this gives councils the incentive to encourage local economic growth, we know that it’s not that simple.

Some Labour council areas, like Greater Manchester, will be very positive about the potential for growth, but there are other councils that fear they will lose out. And it is easy to see why some Labour councils have cause for concern. When you look at the government distribution of cuts so far, for example in the Grant Settlement for 2011-12, it is clear that the impact has been very uneven. Councils in the north, metropolitan councils and districts have been hit very hard; the bottom 5^th of councils in terms of deprivation had the largest cuts.

The measures in the Finance Bill could have a similar effect. The deals are going to benefit those councils where times are already good and there is a risk that the richest councils remain rich, with the greatest ability to attract business and gain additional resource, and the poorest councils remain poor, with limited ability to invest in economic growth locally. And this brings us back to why redistribution is so important.

The principal factors in redistribution are the level of deprivation in an area and the relationship between the ability to raise finance locally, balanced against the demand for services. That is, those areas that have high deprivation and demand for services and limited ability to raise finance locally benefit from funding through redistribution from more prosperous areas. What this tends to have meant is that it has been Labour authorities that have been in receipt of redistribution. When you look at this deal on business rates in the Bill some Labour authorities could potentially lose out. Particularly in metropolitan centres in the north east and north west where redistribution is needed most.**

Some Labour authorities in these areas, with high deprivation and limited ability to generate new business, could be facing a real problem if the redistributive element of funding is cut. These councils will be carefully considering what this looks like for their position and how they are to move forward.

In the short term, councils need to be aided in finding a path through; innovation and risk taking should be supported. In the longer term however, the Party needs to develop a strong policy approach to local economic growth. Some on the Left have already started to look at this – Labour’s Business for example – but it needs to go further. Crucially, Labour in local government needs to be engaged – the area where Labour have power to take local economic policy forward now.

*Leeds, Liverpool, Newcastle, Nottingham, Manchester and Sheffield.

**Looking at employment figures, for instance, the 2010 English Indices of Deprivation tell us that of the top 20 most deprived areas, 18 of them are in the North East and North West. Of these 18, 17 of them are in Labour local authority areas. Regional Economic Performance Indicators published in May 2011, show that places like the North East and North West, predict that as a percentage of the adult population those expecting to start a business within the next 3 years fall below areas in other parts of the country – particularly London.

Laura Wilkes is a Policy Manager at Local Government Information Unit. She writes here in a personal capacity.