Paul Dossett, head of local government at Grant Thornton UK LLP, said:
"Changes announced today represent the biggest change in local government finance in 35 years with the end of the block grant. This has scope to completely redraw local government – but it needs to be accompanied by further decentralisation (in particular relaxing national targets and rules that hinder collaboration between local services such as health, social care, housing and police) and fiscal devolution in order to enable local authorities to build vibrant local economies and genuine place based solutions.
The Chancellor confirmed the scale of the funding reductions being faced by local government over the life of this parliament in his Spending Review announcement today, with plans to phase out all the block revenue grant by 2020. He also announced that councils will be spending in 2019/20 the same in cash terms as they are currently. There remain many significant 'ifs' to determine if this scenario will be achievable.
The most significant announcement is that the main central government revenue grant to local government will be phased out completely by 2020. This will leave council tax and business rates as the main source of local government revenue finance, but both retain significant central control. For example, for a local authority to increase the council tax above 2% requires local electors to vote in favour and business rates can only be increased by a democratically elected mayor of a combined authority, of which none exist at present.
It's a fallacy to assume that local authorities can use reserves to help absorb the removal of the block revenue grant, because they can't be used in a recurring way – they can never prop up baseline revenue budgets in lieu of government funding reductions. They can only be used as a one off contribution to revenue spending and do not provide a sustainable solution to maintaining local authority services. However, greater scrutiny of how reserves are being used should be an important area of focus for members. Local authorities have been acting responsibly in the use of reserves, particularly given uncertainties over future central government funding reductions and the Chancellor does not seem to appreciate the irony of criticising the last Labour government for "not saving for a rainy day" when accusing local authorities of doing just that with their use of reserves.
In addition, unless there are further changes to local government's capital financing regime, the retention of 100% of capital receipts will have limited benefit in terms of funding service delivery.
Whilst no new devolution deals were announced today, it is clear that the Chancellor sees devolution as a key solution to these challenges, both as a key enabler of the necessary scale of public service reform required, as well as a key driver of economic growth. But devolution remains in its infancy, with less than ten localities having some form of deal on the table. Even the front-runner Greater Manchester is some way off implementing any form of devolution, let alone being in the position of realising improved outcomes, savings and efficiencies.
Local authorities have been well led in recent years, but failure to further shape their future and work within the opportunities and threats in which they find themselves, will mean that some authorities could face a financial tipping point during the course of this Parliament."