The IFS analysis is based on 2022-23 data that has been plugged into the old relative needs formula (RNF) that was abandoned in 2013. This is not necessarily what the Government would do to reform the system. It could make adjustments to the old calculation and it could also change what proportion of funding is determined by any kind of formula, says Phillips. But the local authorities at the top end of the scale are likely to lose out, whatever the reforms.
The old RNF incorporated local population demographics and demand for council services, such as adult and children’s social care, and then accounted for local factors that determined the costs for councils to deliver services, such as wages and housing costs.
These needs were then weighed up against each council’s own abilities 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 the country’s. In turn, this determined how much central government grant cash they received.
In 2013, the annual assessments were scrapped entirely because the then chancellor George Osborne felt the system undermined incentives for local authorities to try and grow the local economy.
This was a legitimate aim, says Phillips, but it left a policy vacuum. Since then, funding allocation has not been properly adjusted even to account for changes in the size of local populations, such as the fact that Kensington and Chelsea’s population has fallen by 5pc, while Tower Hamlets’ in east London has increased by 20pc.
To make matters worse, the funding allocations were already distorted. In around 2006, the Labour government began making tweaks to channel cash to areas that policymakers wanted to prioritise, says Phillips.
Then came austerity, when the Tory government slashed central government grant funding indiscriminately. This meant that the poorer areas that relied more heavily on government grants saw bigger drops in their overall funding, warping the system.
“It is massively out of date,” says Betts. “It is absolutely right that the funding review is based on up-to-date information, and if some councils are able to manage the delivery of services more easily because they have had settlements that haven’t been altered for years, and they’ve got more money than they would now get on the current data, then it’s right that that should be adjusted.”
The Conservative government launched a consultation on setting new baseline funding allocations for local authorities at the end of 2017, but nothing ever happened because it was too difficult politically.
Will this Government actually do it? “Obviously, they are going to have to,” says Betts.
A Ministry for Housing, Communities and Local Government spokesman said: “This Government will fix the foundations of local government and 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 settlements, 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 channelled to the areas that need it most,” he says.
On the flipside, it also makes it a more painful process for those losing out.
The old formula is an assessment of needs relative to everybody else, rather than an assessment of how much cash each council actually needs to deliver its services.
And underlying everything is a bigger problem, which is that there is not 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.”