How wealthy rural councils could be forced to fund England’s deprived town centres

The IFS analysis is based on data from 2022-23 that was fed into the old relative needs formula (RNF) that was scrapped in 2013. This is not necessarily what the government would do to reform the system. It could make tweaks to the old calculation and could also change what proportion of funding is determined by any kind of formula, Phillips says. But local authorities at the top of the scale are likely to lose out, whatever the reforms.

The old RNF incorporated demographic data on the local population and demand for council services, such as adult and children’s social care, and then took into account local factors that determined the costs for councils to deliver services, such as salaries and housing costs.

These needs were then weighed against each council’s own ability to raise revenue through council tax and business rates. Combined, these factors were used to calculate a council’s relative needs, as a proportion of those of the country. This in turn determined how much central government grant money they received.

In 2013, annual assessments were scrapped altogether because then Chancellor George Osborne felt the system undermined incentives for local authorities to try to grow the local economy.

This was a legitimate aim, Phillips says, but it left a political vacuum. Since then, funding allocation has not been adequately adjusted even to take account of changes in local population sizes, such as the fact that the population of Kensington and Chelsea has fallen by 5% while that of Tower Hamlets in east London has increased by 20%.

To make matters worse, funding allocations were already skewed. Around 2006, the Labor government began making adjustments to channel money to areas that policymakers wanted to prioritize, Phillips says.

Then came austerity, when the Tory government indiscriminately cut central government grant funding. This meant that poorer areas that relied most heavily on government grants saw larger falls in their overall funding, distorting the system.

“It’s massively out of date,” says Betts. “It’s absolutely right that the funding review is based on up-to-date information, and if some councils are able to manage service delivery more easily because they’ve had arrangements that haven’t been changed for years, and they have more money than they would now with the current data, then it’s right that that should be adjusted.”

The Conservative government launched a consultation on setting new core funding allocations for local authorities in late 2017, but nothing came of it because it was too politically difficult.

Will this government actually do that? “Obviously, they’re going to have to do that,” Betts says.

A spokesperson for the Department of Housing, Communities and Local Government said: “This Government will fix the foundations of local government and will work closely with the sector to do so.

“We will get councils back on their feet by getting the basics right – providing more stability through multi-year funding agreements, ending competitive bidding for pots of money and reforming the local audit system.”

The problem is becoming increasingly urgent. If the Government does not act soon, more councils will be forced into emergency financial measures, says Phillips.

“When the public finance situation is difficult, as it is now, it is even more important that funding is channeled to the areas that need it most,” he says.

On the other hand, this also makes the process more painful for those who lose.

The old formula is an assessment of needs relative to everyone else, rather than an assessment of how much money each council actually needs to deliver its services.

And behind all this is a bigger problem, which is that there isn’t enough money to go around, says Betts. Many of the councils that have benefited from the current system are still squeezed.

“Even if you rearrange the deck chairs, there is still a problem on the Titanic.”