Article by Owen Holzinger, National Assembly for Wales Research Service
The Fourth Assembly saw significant reductions to local government budgets. With the potential for financial pressure to increase in the Fifth Assembly, will there be changes to the financial model?
From 2010-11 to 2014-15 local authority revenue funding fell by £461 million in real terms. This pressure has led to questions about how finances are distributed and, more fundamentally, whether the current financial model is robust enough to manage further strain.
Local government cuts
The Welsh Government provides around 80% of the funding for local authorities. During the Fourth Assembly, this funding reduced significantly as the decrease in the Welsh block grant (estimated to be £1.2 billion lower in real terms in 2014-15 than 2010-11) impacted on local government.
Demographic changes
While funding has been decreasing, pressure on local services is increasing. Wales’s population is growing, with Welsh Government projections forecasting a proportional increase in the most dependent age groups (0-15 and 65+) compared to the working age population.
The reductions have fallen disproportionately on particular services. The Welsh Local Government Association (WLGA) estimates that libraries, cultural services and transport services (among other areas) have faced cuts of between 20% and 50%, leading to significant change in how these services are delivered. Other services, such as social care and schools, have been protected. Local authorities have reacted to the budget reductions by generating internal efficiencies, or by cutting, commercialising or limiting services. All 22 local authorities have raised council tax year on year since 2011 (between 2010-11 and 2015-2016, average council tax rose 18% across Wales). Local authorities have also been exploring the use of alternative delivery models (ADMs) and community asset transfers (CATs) to operate some or all aspects of services. The Welsh Government has consulted on a national framework to support decision-making for ADMs and produced best practice guidance for CATs. The Fifth Assembly may see more of these cost-saving methods. In 2014-15 local authorities held £832 million in earmarked reserves and £196 million in general reserves. If future funding reductions fall at the more extreme end of the scale, there could be further scrutiny of how these reserves are used.
Recommendations from the Fourth Assembly
In reviewing the 2016-17 budget and local government settlement, the Finance Committee recommended the Welsh Government should review the funding formula.
Maintaining the formula
Reduced budgets have led many to question the method used by the Welsh Government to distribute funding to local authorities. The ‘distribution formula’ is maintained by the Distribution Sub-Group and it contains 68 different indicators. For example, there are indicators that relate to:
- population;
- numbers of children and older adults;
- road lengths;
- deprivation; and
- rurality and sparsity.
Elements of the formula are updated each year, with the formula last fully reviewed ahead of the 2001-02 settlement. Some of the calculations use data from the 1991 and 2001 censuses and this has been raised as a concern. Historically, funding floors, caps and top-ups have been used to limit reductions, when necessary. Most recently in 2016-17 the three authorities with the largest reductions received a top-up grant, meaning no reduction was more than 3%. This required an additional £2.5 million allocation from Welsh Government reserves. Rural authorities have argued that the formula does not adequately account for the additional cost of providing services across sparsely populated areas. Of the total indicators, only 6% relate to sparsity, while 69% are based on clients (e.g. population, pupil numbers) and 25% on deprivation. A step-change in data could mean very different funding situations for authorities from one year to the next, and any review would need to consider how to moderate large drops in funding.
Flexibility and localism
Alongside other reforms, the previous Welsh Government acknowledged a need to review the local government finance system, seeing the current system as complex. The last Welsh Government said it would aim to produce a system that, among other things, allowed greater freedom to make local decisions. Local government itself has also called for changes, requesting more fiscal autonomy and more flexibility to decide how authorities spend their money. This would allow local solutions and more accountability, and the WLGA sees this as complementing the efficiencies and innovation required by the current financial climate. The Independent Commission on Local Government Finance Wales (2016) has echoed this call for more flexibility. The draft Wales Bill could give powers to the Assembly to design its own budget process and potentially implement some of these recommendations. A redesigned budget could include such things as multi-year funding strategies, as recommended by the Fourth Assembly’s Finance Committee’s inquiry into Best Budget Practice, and as requested by local authorities. Following the UK Government’s announcement in October 2015 that English councils will retain 100% of business rates collected by 2020, the Welsh Government could potentially allow Welsh local authorities to retain rates as well. Further de-hypothecation of grants could be another option that would allow local authorities more control over how they manage the money they are allocated.
Pressure in the Fifth Assembly
The UK Government’s Spending Review in 2015 outlined that the Welsh block grant will continue to decrease in real terms going into the Fifth Assembly. In line with this, local authorities may have to anticipate similar budget reductions to those they experienced in the Fourth Assembly, at least in the near future. Structural changes such as mergers provide a potential solution (see article on local government reform) but will come at a cost and saving levels are not guaranteed. With mounting pressure, Welsh Government decisions on changes to the financial model will be pivotal in defining the long term future of local authorities.
Key sources
- Distribution Sub-Group, Distribution Sub-group presentation (2015)
- Independent Commission on Local Government Finance Wales, Ambition for Change: Aiming Higher (2016)
- Office for Budget Responsibility, Economic and Fiscal Outlook – March 2016 (2016)
- Wales Audit Office, A Picture of Public Services 2015 (2015)
- Welsh Government, Devolution, Democracy and Delivery (2015)
- Welsh Local Government Association, Localism 2016-21 – A plan for public services in Wales (2015)
