Devolution won’t work unless we fix local government funding

There is a broad consensus on devolving powers, but the next government first needs to fix local government finances, otherwise it will push more responsibility onto an already broken system.

Today, voters will head to the polls to choose 10 metro mayors in the biggest set of devolved elections in England to date. After the election, there will be 12 metro mayors in total, including in all of England’s largest cities, up from just one mayor a decade ago. We can expect more mayors to be appointed in the years to come: 22 areas of England already have a devolution deal in place or in progress, and there is a cross-party consensus on devolution, including a plan from the Labour shadow cabinet for devolution that could eventually give every person in England an elected mayor.

Devolution is necessary and valuable for creating more inclusive regional economies and bringing decision-making closer to residents. Combined authorities like Greater Manchester, the West Midlands and North of Tyne are already bringing buses under public control and promoting worker cooperatives and employee ownership. At NEF, we have seen some of these great local initiatives first hand, working alongside our colleagues from the Centre for Local Economic Strategies (CLES), Co-operatives UK and the Centre for Thriving Places (CTP) with three pilot combined authority areas as part of the Reclaiming Our Regional Economies (RORE) programme.

Devolution has the potential to create many benefits for the UK’s cities and regions. But, as one of the most centralised advanced economies, the UK is wasting this huge potential through a one-size-fits-all system of funding that is not responsive to local need. It’s time for central government to put its money where its mouth is.

This crisis is the result of years of chronic underfunding from central government, which has left local councils in a dire state.”

Political enthusiasm for bringing power closer to people stands in stark relief to a crisis of local government, with council after council going effectively bankrupt. This crisis is the result of years of chronic underfunding from central government, which has left local councils in a dire state. Mayoralties, whose funding and performance is closely linked to local councils, have seen knock-on effects. As local authorities and combined authorities have shared responsibilities in some sectors, such as housing and transport, cuts to local authority spending have a knock-on-effect on combined authorities, whose budgets are too small to make up for the shortfall. In the West Midlands for example, this year’s entire combined authority budget is the same amount (£1.2bn) that Birmingham City Council alone (one of the 7 constituent members of the West Midlands Combined Authority) is seeking to bring in just from selling public assets in order to balance the books. As acknowledged by mayors themselves, the local government funding crisis is a direct threat to devolution.

In October 2023, the Local Government Association estimated that councils in England were facing a funding gap of £4bn over the next two years just to maintain services at their current level. This is in part due to the rapidly increasing costs faced by councils, including in areas like providing temporary accommodation for local people made homeless and providing homes for looked after children, where cost increases far exceed inflation, as well as the rising demand for services in recent years. But this is a crisis that has been a long time in the making. In 2024 – 25, councils have been given 24% less money in real terms to cover their core spending needs (i.e. the funding that a council can spend on what it chooses) than they were in 2010-11. Increasingly, councils are forced to divert funds from other services to maintain the most essential ones, such as adult social care and homelessness prevention. Some councils’ core budgets have shrunk by half since 2010.

There is no shortage of evidence that devolving powers to regional governments without matching them with more funding leads to bad outcomes”

Even the areas of England with new devolved powers and funding have experienced a net decrease in locally controlled spending since 2009. This should ring alarm bells. There is no shortage of evidence that devolving powers to regional governments without matching them with more funding leads to bad outcomes, from poor economic performance to higher death rates during the Covid-19 pandemic.

Consecutive governments since 2017 have promised a comprehensive reform of local government funding, but never delivered. As a result, the way funds are allocated between different councils is not based around current need​.It is still based on assessments that have not been updated for more than a decade, sometimes drawing on data from more than 20 years ago. Despite all the talk of Levelling Up’ from the government, over the past five years the link between local need and actual funding for local councils has grown ever weaker in the absence of proper annual assessments. Council budgets are increasingly reliant on council tax – one of Britain’s most regressive taxes, based on estimated house values from 33 years ago. With power over taxation and public spending concentrated heavily within Westminster, councils are left helpless in the face of the central government’s failure to fund them.

In this context, it is worrying to see the two largest political parties tout devolution while presenting no credible plan to address the crisis of local government funding. This current government has kicked the can down the road, responding to councils’ £4bn financial shortfall with only an extra £600m in funding, the majority ringfenced for social care. Labour’s local elections campaign document contains some sensible suggestions like long-term funding settlements for combined authorities, but the proposals for local government finances come nowhere near what councils need. England desperately needs a comprehensive reform of how local and combined authorities are funded.

The success of devolution relies on supplying local governments with the funding they need. Any future government serious about devolution needs to get to grips with this fact.

Image: iStock

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