Local Government: Funding

Question

Asked by

To ask His Majesty’s Government whether, before or alongside changes in local government structure in England, they will undertake a thorough review of the sources of funding, basis, and equity of local government financial resources at all levels, having regard to both the responsibility of individual councils and the balance of responsibility between central and local government.

My Lords, before I answer my noble friend’s Question, I note that, 80 years ago this month, soldiers of the Soviet 60th Army of the First Ukrainian Front opened the gates of Auschwitz-Birkenau. It has been so moving today—Holocaust Memorial Day—to hear in our media the first-hand accounts of those who may be visiting Auschwitz for the last time. That infamous camp has become the symbol of the Shoah. Today, we remember the Jewish lives, and all lives, lost to genocide, and we remind ourselves that it is more important than ever to keep our humanity and respect for human dignity at the heart of all we do.

In answer to my noble friend: alongside our proposals to widen devolution and streamline local government structures, this Government are making good on their promise to reform and improve the local government funding system. From 2026, funding will be directed to where it is most needed, through the first multiyear settlement in a decade. By fixing the foundations, we will give better value for taxpayers and empower local government to provide high-quality services and support the delivery of the Government’s missions.

My Lords, first, I am sure that the whole House endorses my noble friend’s opening words. It is indeed a moving day.

On my Question, the biggest problem for local authorities is not structure or assessment. This Government and every other Government depend on local authorities’ ability to deliver many of their most important policies and strategies, and yet local government depends on an archaic system of local taxation—both council tax and business tax—and uncertain grants from central government. I hope the assessment that my noble friend refers to will begin to change that system, but does my noble friend not agree that a fundamental assessment of what local authorities need should be introduced so that we can start to improve the financial position of local authorities before the end of this Parliament?

I thank my noble friend. For 12 of the last 14 years, I was a local government leader, so his words definitely strike home to me. The Government are committed to local authority funding reform, with the updated approach that I spoke about from 2026 to 2027. We need to fix the foundations that he spoke about, so this will be developed in partnership with the sector and based on the principle of giving councils early certainty of their funding and a much fairer funding picture across the country. We are inviting views on our principles and objectives for funding reform through a consultation. We want to do this in consultation with the sector, and that consultation closes on 12 February. We will move towards an updated system and possible transitional arrangements to determine how local authorities reach their new funding allocations.

My Lords, we on these Benches share the view of the importance of remembering the Holocaust on this anniversary.

The Minister will be aware that centralisation of taxation in this country is far greater than in any other advanced democracy, and if finance is centralised, decisions will continue to be centralised. Is it not time for the Government to consider fundamental tax reform, in particular of the way local councils are funded? Will the Minister also consult her colleagues on whether we need a cross-party approach to tax reform for local authorities rather than having a tourist tax here and parking charges there, and otherwise depending on the Treasury to dole out funds?

The noble Lord makes a very important point about working on a consensus, which is why we have launched the major consultation on how we should take this forward. In addition, our English Devolution White Paper, which we published in December, sets out our plans to reset that balance between central and local government. That includes both funding and powers, and it is a new framework for English devolution that attempts to move power out of Westminster and back to those who know their areas best. That is the whole purpose of the devolution agreement. We want to see that done on the basis of it coming from the local areas upwards. We are committed to fixing those foundations, and we will do that with the people in our local areas and not to them.

My Lords, on that devolution framework that the noble Baroness just referred to, the Minister in the other place said:

“That is why we are moving power out of Westminster and putting it back into the hands of those who know their area best”.—[Official Report, Commons, 16/12/24; col. 36.]

But power involving money was not devolved, leaving local authorities, as the noble Lord, Lord Whitty, said, dependent on a council tax which is regressive and 30 years out of date and business rates which are killing the hospitality and retail industries. Do we not need a much more fundamental review than the one the Minister just referred to?

The English Devolution White Paper sits at the heart of the reform we want, and that will involve both funding and money. I understand the pressure for urgent reform of council tax, but we have to be committed to keeping taxes on working people as low as possible. It is for local authorities to decide where they set their council tax. The Government will consider longer-term options to improve council tax billing and all those things, but council tax is a well-understood tax and it has very high collection rates. In terms of business rates, we published a discussion paper, Transforming Business Rates, which set out the priority areas for reform. We have had very good engagement on that and we will publish our update in due course.

My Lords, what guarantee can the Minister give that the most locally funded arts and cultural services—including libraries—such as at district council level, will not be further lost in this reorganisation, against a background where, it has to be said, cuts to such services are continuing in many localities?

As the noble Earl said, arts and leisure services took an absolute bashing as local government funding was successively cut over recent years. The purpose of devolution is to put control for that back into local hands and to make sure that more of the money spent in Westminster gets spent in the local areas to protect the services that people really care about and feel are important to them. I hope that will include those key leisure, arts and cultural services that make life around this country so rich and wonderful.

My Lords, I associate these Benches with the noble Baroness’s comments earlier.

I refer to my interests as a central Bedfordshire councillor. A recent survey published by Southwark Council revealed that 61% of councils have already cancelled, paused or delayed housebuilding projects and more than one-third have cut back on repairs and maintenance of council homes due to pressures on their housing budgets. In light of this and given the Government’s ambitions for housebuilding, will the Minister tell the House how this Government will support councils to build?

I have to say that it is very difficult to take lessons from the Benches opposite about local government funding, particularly in relation to council house building. The noble Lord will be well aware of the steps we have already taken to increase overall funding for local government but also that we have taken big steps to alter right to buy so that local authorities can keep 100% of the receipts they get from right-to-buy properties. We are changing the position on new properties built by local councils so they do not have to sell them at less than they built them for. We are fixing the foundations of a very broken system that we inherited from 14 years of the noble Lord’s Government.

My Lords, the last Tory Government spent 14 years taking money from the poorest local authorities and giving it to the richest ones. Will the Minister guarantee that the system that comes forward will be fair and be based on the need to spend?

My noble friend is absolutely right. The review that we are undertaking as part of the spending review in the spring will do just that. We made some steps forward in this year’s settlement; we need to take further steps in that regard, and the local government funding formula will be reset to take account of need.

My Lords, I declare my interest as a vice-president of the Local Government Association. With Labour’s increase in employer national insurance contributions, LGA analysis confirms that the cost to local government will be around £1.7 billion next year. The provisional local government finance settlement confirms that councils will be compensated to the tune of £515 million for 2025-26, well short of the £1.7 billion. Can the Minister confirm from the Dispatch Box whether this compensation funding is a one-off, or will it be continued in future financial settlements? How does she expect local authorities to compensate for the shortfall?

As I said, the decision that we took around national insurance contributions was to fill the gap from the £22 billion black hole that was left by the Government of the Benches opposite. We continue to work on fixing those foundations and making the economy stronger. The noble Baroness asked specifically about the £515 million of support that we have provided to local government. That is in addition to other sources of funding that we gave to local government. Whether that will continue into future years will be the subject of the spending review in the spring. We will look at all aspects of local government funding so that we continue to fix and sort out the mess that we were left with.