Councils battered by demographics

Islington is far from alone. Much of inner London is going through a similar experience, something the London Assembly has acknowledged as an ‘existential challenge’ for the city. It’s a snapshot of a phenomenon increasingly seen around the world in places like South Korea, Japan, China and Italy. Across Britain, inner cities are following similar paths, while outskirts and commuter towns grow.

High housing and childcare costs are often cited as major factors that drive young adults and families out of cities, while birth rates generally are falling and family structures changing.

Chain reaction

Such major shifts in population affect many of the services that councils provide. Schools and nurseries gradually become unsustainable, while social care demands grow. As time goes on, the tax base is eroded as the retirement population grows and the working-age cohort thins out.

‘A lot of the funding that is received by local authorities comes through formulae that always have a significant population element in them,’ explains Tony Travers, a professor and interim dean of the LSE School of Public Policy. He cites the local government funding formula, the schools funding formula and the NHS as examples.

‘As particular parts of the population decline, clearly the relevant funding formulae will be affected,’ Travers says. ‘When it comes to schools, it’s hard to shrink them one for one – as pupil numbers reduce, school numbers and teacher numbers don’t come down in a pro rata way.’

While pupil numbers may be reducing sharply in some areas, the number requiring special educational needs and disabilities (SEND) support is rising sharply. According to official figures, one in five pupils in England receive some kind of SEND support. Analysis by the Institute for Fiscal Studies has found that the state’s spend on SEND is expected to more than double in real terms between 2015 and 2028.

Councils are obliged to provide funding for SEND requirements and social care, and the rising costs account for an ever-greater proportion of local authorities’ budgets.

Enver Enver FCCA has seen this first-hand. He has 30 years’ experience in the public sector, including as a former CFO at the Greater London Authority and former interim FD at Gloucestershire County Council.

‘Money gets locked into statutory activities for a council, and it gives them less flexibility to put money into growing their local economy,’ he says. ‘Between 65% and 75% of the funding is locked into vulnerable adults and vulnerable children. You can’t take that money away.’

Housing is another service that is affected as demand shifts. Mark Green, director of finance at Maidstone Borough Council, has seen both sides of the coin. ‘With housing, what we’re seeing in Maidstone – in common with lots of authorities in the south-east – is a big issue with homelessness,’ he says. ‘In particular, London authorities are having to accommodate their homeless families outside London.’

According to Shelter, around 43,000 homeless families in England are accommodated outside their home council area. ‘That creates pressure here on social services and schools,’ Green says.

Limited forecasting ability

The reliance on formulae to calculate funding, combined with a centralised system with little visibility over future income, leaves councils ill equipped to respond to demographic shifts.

‘The system takes time to catch up,’ Green says. He cites the example of a shortage of school places at the secondary level in Kent. ‘The council has to create new school places either through building new schools or adding classes onto existing schools. Often, the funding isn’t there to do that because of the way the system works.’

The issue has been exacerbated by councils’ inability to forecast beyond the end of their financial year, Green adds, although he acknowledges that matters have improved with the most recent funding settlement from central government, which covers 2026/27, 2027/28 and 2028/29.

The previous annual settlements meant councils ‘didn’t know what central government funding we would get for the following financial year until just before Christmas’, Green explains.

The grant funding structure with central government is ‘like a lottery’, Travers says. ‘You can never be certain how the next government will measure spending needs in its formula, and therefore you can never predict. All this does is encourage council finance chiefs to be unconscionably cautious.’

Is change coming?

One aspect of local government policy that is now in a state of flux is the planned merger of smaller councils with larger authorities. New legal advice has forced the withdrawal of plans for mergers in Hampshire, Essex, Norfolk and Suffolk, while 14 other multi-council reorganisations have been paused, pending review.

Nevertheless, Andy Burnham’s ascent to prime minister is a potentially exciting moment for local authorities, as he puts their devolution at the heart of his agenda.

Travers says: ‘Local government has been underfunded now for 16 years, and Burnham will have to address that as well as devolution.’

Giving mayoral strategic authorities access to local business rates and a share of income tax will ‘give those authorities an incentive to grow the tax base and therefore the economy’, he adds, but warns this will only be the case if the equalisation process is recalibrated or dropped. Equalisation in its current form ‘would remove all the incentives’, he says.

Meanwhile, mayors and local leaders are to be given the power to tax overnight visitor stays and use the proceeds to invest in their areas.

Enver says that other options for providing councils with a greater range of revenue streams include environmental taxes, enabling VAT to function as a local tax, and giving more flexibility to public-private partnerships.

‘There’s an opportunity around giving local authorities more autonomy,’ he adds. ‘Local authorities should be given more devolved powers to think of income generation ideas and to retain the proceeds.’